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Read the details of RBI MPC Meeting 2025 decision and its impacts on the economy and various financial instruments.
The Reserve Bank of India (RBI) has reduced the repo rate or repurchase rate from 6.5% to 6.25% in its three-day Monetary Policy Committee Meeting that concluded on 7th February 2025. This was the first meeting chaired by RBI Governor Sanjay Malhotra, who was appointed recently.
This blog highlights the RBI’s MPC Meeting 2025 decision in detail and the impacts it can have on the Indian economy.
RBI MPC Meeting 2025 Decision
The rate of interest at which banks borrow money from the RBI is the repo rate. If repo rates are high, it means RBI charges high interest rates from banks, and banks, in turn, charge higher interest rates from the public. Let us look at RBI’s decisions in detail:
- RBI Monetary Policy Committee conducts six meetings in a financial year. These meetings are conducted once every two months. The February 2025 meeting was the last meeting for FY25.
- RBI started its rate hike cycle in May 2022, when because of supply chain disruption and covid-19 pandemic the Consumer Price Inflation stood at 7.79% (April 2022). At the time the repo rate stood at 4% .
- The rate hiking cycle concluded in February 2023 with the repo rate at 6.5%, and since then, the repo rate has been left unchanged. This was done to bring the inflation rate under the RBI’s target range of 2-6% .
- From September 2023 to September 2024, the inflation rate was under the RBI’s target range of 2-6%, but it shot up again in October 2024 and was recorded at 6.21%. The inflation again cooled down, and in December 2024, it stood at 5.22%.
- With inflation under control, RBI took the decision to lower the repo rate by 0.25% or 25 basis points in February 2025. The last rate cut took place in May 2020.
Rate Cut Decision Impact
Now, let us take a look at the potential impact of the RBI monetary policy 2025 decision on the economy and the financial markets.
Increased Disposable Incomes
With reduced rates of interest, the interest payment on loans becomes cheaper. This reduces the loan EMI amounts and the disposable income increases. Instead of paying interest, this money is spent elsewhere in the economy, therefore raising the economic activity.
Easy Loans
When repo rates are reduced, borrowing costs get lower and it becomes easier to borrow money, and loan EMIs are easier to pay. So, individuals and businesses borrow more money for various reasons. That money is spent on either personal or business reasons, therefore increasing the levels of economic activity.
Lower Returns on FDs and Deposits
When repo rates are decreased, banks and non-banking financial companies (NBFCs) also reduce the interest that is paid on bank deposits. This makes bank deposits relatively unattractive. It also reduces the rate of returns on pre-existing bank deposits.
Potential Currency Depreciation
When the central bank of a country lowers the interest rates it makes, the bonds of that country are less attractive as compared to the bonds of countries with higher rates. This can lead to Foreign Direct Investment (FDI) outflows. Therefore weakening the local currency.
Inflation
With interest rates lowered, the supply of money increases in the economy, which leads to rising demand for goods and services and, in turn, raising inflation. When inflation rises, the currency of that country devalues. This can lead to further FDI outflows because holding investments in a country with a depreciating currency lowers the returns for foreign investors.
Influence on Financial Markets
Following the RBI’s interest rate reduction decision, various financial assets are impacted in the following ways:
- Stocks: The rate cuts are believed to increase economic activity. That is deemed profitable for companies as they get access to cheaper loans, and the demand for goods and services also increases. Rate cuts can be especially beneficial for banking and NBFC companies since they tend to increase the demand for credit.
- Bonds: When interest rates are lowered, new bond issuances take place at lesser interest rates. This makes previously issued bonds (at higher rates) more attractive. Investors rush to buy those bonds, effectively raising their prices, which in turn lowers the yields on those bonds.
- Currency: Rate cuts often lead to the depreciation of local currency. This happens because rate cuts can lead to inflation. Inflation reduces the real returns of assets. This can lead to an outflow of investments to other countries, therefore weakening the local currency.
Always remember that the impact of rate cuts on financial assets is seen over time and not right after the rate cuts are announced. These changes in financial assets might take weeks or months to materialize.
Economic Projections and Key Data
Here are some of the key important facts and figures from the RBI Governor’s speech:
1.GDP: The RBI’s GDP growth projection for the upcoming financial year is at 6.7%. For the first quarter of FY26, the RBI projected a year-on-year GDP growth rate of 6.7%, that is revised from 6.9% that the RBI projected in its December meeting.
For the second quarter of FY26, GDP growth projections have been revised from 7.3% in the December meeting to 7%. Projections for the third quarter stand at 6.5%, and for the fourth quarter, it stands at 6.5%.
RBI’s GDP Growth Rate Projections for FY26
2.Inflation: The RBI’s inflation forecast for FY26 stands at 4.2%. In the first quarter of FY26, the inflation estimates have been revised from 4.6% (December meeting) to 4.5%.For the second quarter, the inflation forecast stands at 4%, 3.8% for the third quarter, and 4.2% for the fourth quarter.
RBI’s Inflation Rate Projections FY26
3.Banking and NBFC: The RBI governor, in his speech, also stated that the RBI expects the banking and NBFC sector to remain stable in FY26. Meaning that this sector is not expected to face any economic headwinds in the upcoming financial year.
4.MPC Stance: The RBI will keep its stance neutral. It means they will neither reduce interest rates rapidly nor wish to keep rates at these levels. The RBI will act according to inflation data and try to create a balance between growth and inflation.
5.Current Account Deficit: The current account deficit was 1.2% of the GDP in Q2FY25. This means that imports exceed exports by 1.2% of the GDP. This can put pressure on the exchange rate and weaken the rupee.
6.Remittances from Abroad: The remittances from abroad stood at $129.1 billion in 2024. This means $129.1 billion of foreign exchange was sent to India in 2024. This inflow helps stabilize the current account deficit, fiscal deficit and the value of the rupee against foreign currencies.
7.Foreign Exchange Reserves: RBI’s Foreign exchange reserves stood at $630.6 billion, covering 10 months worth of imports. This reserve helps in stabilizing against disruptions in trade or global capital flows.
Conclusion
Market analysts were already expecting interest rate reduction by the RBI in its February 2025 meeting. Due to this, stock market reaction to the RBI MPC meeting 2025 decision was subdued. Investors should always remember that the impacts of RBI decisions come with time. Investors should not expect the impacts to show up instantly; it takes weeks or even months for capital and investment flows to take place.
DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.
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