RBI Slashes Interest Rates to 5.5% as Growth Slows and Inflation Dips to Six-Year Low

India’s central bank, the Reserve Bank of India (RBI), has lowered interest rates by half a percent, marking the third consecutive cut amid slowing inflation and economic growth. The repo rate now stands at 5.5%, the lowest level in three years. This rate determines how much banks pay to borrow money from the RBI, directly impacting borrowing costs for consumers on home loans, car loans, and other credit.

RBI Cuts Rates to Spur Growth Amid Global Uncertainty and Cooling Inflation Trends

RBI Governor Sanjay Malhotra explained that the economic growth has been “lower than our aspirations,” prompting the bank to stimulate domestic consumption and investment. The decision reflects concerns about rising global uncertainties that could further dampen India’s economic momentum. This move follows previous rate cuts in February and April, signaling a consistent effort to support growth.

India’s economy grew by 6.5% in the last financial year, retaining its position as the fastest-growing major economy despite a sharp slowdown from the 9.2% growth recorded the previous year. Inflation has eased to 3.16% in April, the lowest in six years and below the RBI’s 4% target, thanks largely to falling food prices. The RBI now forecasts inflation to remain lower than previously expected for the year ahead.

RBI Adopts Neutral Stance as Lower Rates Boost Growth and Tame Inflation Pressures

While the RBI has cut rates, it has shifted its policy stance from “accommodative” to “neutral,” indicating future rate decisions will depend on the evolving balance of growth and inflation. Favorable factors such as a strong monsoon boosting food supply, lower global commodity prices, and a strong Indian rupee are expected to keep inflation in check, allowing the RBI to maintain relatively low rates.

Lower borrowing costs are expected to stimulate growth by enhancing household purchasing power, reducing costs for businesses, and easing government debt payments. The move is particularly beneficial for homebuyers and the struggling real estate market. According to Anuj Puri, chairman of ANAROCK Group, cheaper home loan EMIs improve affordability, especially in affordable and mid-income housing segments, which were hardest hit during the pandemic. Following the announcement, Indian markets rallied sharply, reflecting investor optimism.