The Reserve Bank of India (RBI) has delivered a surprise 50 basis point cut in its benchmark interest rate, bringing the repo rate down to 5.5%, its lowest level in three years, as the central bank responds to weakening economic growth and rapidly cooling inflation.
This marks the third consecutive rate cut this year, following earlier reductions in February and April. Alongside the cut, the RBI also injected more liquidity into the financial system to support lending and investment.
RBI Governor Sanjay Malhotra explained that the move was driven by concerns over sluggish domestic demand and global economic uncertainties. “Growth is lower than our aspirations,” Malhotra said, adding that it was “imperative to stimulate domestic consumption and investment.”
India’s GDP grew 6.5% in the financial year ending March, maintaining its status as the world’s fastest-growing major economy. However, this figure is a sharp drop from the 9.2% growth recorded in the previous year.
At the same time, inflation has eased more quickly than expected. Retail inflation fell to 3.16% in April, the lowest in six years, well below the RBI’s 4% target. Falling food prices and a stronger rupee contributed to the decline, prompting the RBI to revise its inflation forecast downward for the year ahead.
Despite the aggressive rate cut, the RBI shifted its monetary policy stance from “accommodative” to “neutral,” signaling that future moves will depend on evolving data.
Analysts believe that the easing of borrowing costs could revitalize consumer demand, reduce financing burdens for businesses, and spur activity in interest-sensitive sectors. The real estate market, in particular, is expected to benefit.
“This effectively lowers the cost of borrowing, making home loan EMIs easier on the pocket and thereby directly improving affordability,” said Anuj Puri, chairman of real estate consultancy ANAROCK Group. “It can potentially boost demand, especially in the affordable and mid-income housing segments, which were hit hardest during the pandemic.”
Indian equity markets rallied in response to the announcement, reflecting investor optimism that lower rates could lift economic momentum in the months ahead.
Written By Rodney Mbua
