RBI cuts repo rate by 25 bps for the first time in 5 years, citing growth concerns, inflation stability, and alignment with targets.

The Reserve Bank of India (RBI) cut the repo rate by 25 basis points to 6.25%, the first rate cut in almost five years. This decision comes as inflation is aligning with targets and concerns over slowing economic growth. The RBI also kept the monetary policy stance “neutral” to support growth while keeping inflation in check. The last rate cut was in May 2020, when it was reduced to 4%.

RBI Policy: 5 Key Takeaways

1. RBI Cuts Rates

The Reserve Bank of India’s (RBI) Monetary Policy Committee decided to reduce the repo rate by 25 bps to 6.25%, marking the first rate cut in nearly five years. This decision aligns with market expectations, driven by growing concerns over economic growth, especially after the 2025 Budget.

2. Growth Outlook

While India’s GDP growth forecast for FY26 remains positive at 6.7%, the RBI has downgraded its growth projection for FY25 to 6.4% from the earlier 6.6%. The growth outlook is impacted by global economic challenges and continued uncertainty, although the first quarter of FY26 is expected to see 6.7% growth.

3. Inflation Easing

The RBI expects inflation to moderate and gradually approach the 4% target. CPI inflation for FY25 is projected to be 4.8%, with a decline to 4.2% for FY26. The easing is attributed to favorable agricultural production, especially the Kharif crop, and a drop in food prices, although core inflation may rise moderately.

4. External Sector Resilient

India’s external sector remains strong, with the current account deficit (CAD) remaining manageable. It moderated from 1.3% of GDP in Q2 of last year to 1.2% in Q2 of this year. As of January 2025, India’s foreign exchange reserves stood at $630.6 billion, providing an import cover for over 10 months, signaling strength in the external sector.

5. Liquidity Conditions

The RBI reported a liquidity deficit in the banking system during December 2024 and January 2025 due to factors like advance tax payments, capital outflows, and increased currency in circulation. The RBI assured its commitment to providing adequate liquidity to the system and will continue monitoring and managing liquidity conditions to ensure financial stability.

Market Reaction to RBI Rate Cut: Volatility Across Sectors

1. Market Volatility Post Policy Announcement

Following the RBI’s policy announcement, Indian stock markets experienced heightened volatility. The BSE Sensex dropped by 328 points (0.4%) to an intraday low of 77,730.37, while the Nifty 50 declined by 110 points (0.4%) to 23,493.60. Broader market indices underperformed, with midcap stocks falling by 0.6% and smallcap stocks declining by 1%.

2. Performance of Rate-Sensitive Sectors

Rate-sensitive sectors, particularly banking and financial services, reacted sharply to the RBI’s decision. The Nifty Bank and Nifty Financial Services indices fell by over 0.4% each. Major banking stocks such as SBI, Axis Bank, and ICICI Bank saw losses exceeding 1%, while PSU banks, except Union Bank of India, also faced declines. In contrast, Nifty Auto gained 0.6%, and Nifty Realty advanced by 1%.

3. Banking and Financial Services Under Pressure

Banking stocks saw broad declines, with major banks like SBI, Bank of Baroda, and Axis Bank registering losses of more than 1%. In the financial services space, PFC dropped over 1%, while other stocks like HDFC AMC, ICICI Prudential, and LIC Housing Finance also saw declines. However, Muthoot Finance and Shriram Finance bucked the trend, rising by more than 0.5%.

4. Auto and Realty Sectors Outperform

The auto sector demonstrated resilience, with Apollo Tyres leading the charge, up nearly 3%, followed by Ashok Leyland and Mahindra & Mahindra with over 1% gains. In the realty sector, Lodha Group saw a rise of over 2%, with Godrej Properties, Oberoi Realty, and Phoenix Mills gaining more than 1% each.

5. Impact on Housing and Commercial Real Estate

The RBI rate cut, along with recent budgetary tax benefits, will boost the housing sector, especially for affordable housing and first-time homebuyers. Reduced home loan rates are likely to improve consumer sentiment. Lower borrowing costs are expected to benefit commercial real estate, including office spaces and REITs, giving the market a timely boost.

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