India’s central bank implements significant rate reduction as growth and inflation decline

India’s Central Bank Cuts Interest Rates

India’s central bank has implemented a larger-than-expected interest rate cut, reducing rates by more than half a percent. This marks the third consecutive decrease for Asia’s third-largest economy, which is experiencing declining growth.

In addition to the rate cut, the bank also increased the liquidity in the financial system.

Currently, the repo rate—the rate at which the central bank lends to commercial banks—is set at 5.5%, the lowest it has been in three years. This change significantly influences the cost of mortgages and other loans.

RBI Governor Sanjay Malhotra explained that growth has been “lower than our aspirations.” He emphasized the need to stimulate both domestic consumption and investment in light of growing global uncertainty.

This latest reduction follows two previous cuts made in April and February.

Recent data indicated that India’s economy grew by 6.5% in the fiscal year that ended in March. Even though the country remains the fastest-growing major economy globally, this growth rate represents a sharp decline from the record high of 9.2% between 2023 and 2024.

In terms of inflation, India’s retail prices fell more than anticipated, hitting 3.16% in April—the lowest level in six years and below the RBI’s target of 4%. This drop was largely due to decreasing food prices.

The RBI also predicts lower inflation rates for the upcoming year.

Despite these adjustments, the central bank shifted its monetary policy stance from “adjustable” to “neutral,” suggesting that any further reductions in interest rates will depend on how India’s economic conditions evolve.

Better-than-expected monsoon seasons, falling prices for essential goods like oil, and stronger currencies could help maintain low inflation levels in the coming months. This would allow the RBI to keep rates favorable for longer.

Lowering borrowing costs can contribute positively to growth by enhancing household purchasing power, reducing corporate expenses, and easing government debt burdens. It also provides much-needed support for home buyers and the struggling real estate market.

Anuj Puri, chairman of the Anaglock Group, noted, “This effectively reduces borrowing costs and provides easier mortgage payments, which directly improves affordability for buyers. This could stimulate demand in India’s real estate sector, especially within the affordable middle-income segment, which has been hit hard by the pandemic.” Sales and new project launches have notably decreased in the seven major cities.