RBI Cuts Interest Rate by 25 bps to 6.25%: First Reduction in 5 Years

Mumbai, Feb 7 (PTI) The RBI under new Governor Sanjay Malhotra on Friday cut interest rate for the first time in nearly five years as the central bank pivoted the policy stance to support a shuttering economy.

The 25 basis points rate cut to 6.25 per cent comes after last rate reduction in May 2020. The last revision of rates happened in February 2023 when the policy rate was hiked by 25 basis points to 6.5 per cent.

The Monetary Policy Committee (MPC) unanimously decided to slash policy rate by 25 basis points to 6.25 per cent, Malhotra said.

The interest rate cut comes within a week of Finance Minister Nirmala Sitharaman in Budget 2025-26 providing biggest ever tax break to the middle class to boost consumption after the economy has slowed to its lowest pace since the pandemic.

The rate increase cycle was paused in April 2023 after six consecutive rate hikes, aggregating to 250 basis points since May 2022. The last rate hike was done by RBI in February 2023.

Post Budget, the Finance Ministry made a case for rate cut by saying that fiscal and monetary policy should work in tandem.

It was an indication that the RBI should cut rate as the Union Budget has announced several measures including income tax relief.

Earlier this week, Finance Secretary Tuhin Kanta Pandey had said the government has taken measures to lower fiscal deficit and delivered a non-inflationary Budget, and hoped that the RBI's monetary policy will work in tandem with fiscal policy to support growth.

The Budget 2025-26 announced slew of measures including significant income tax cuts for the middle class, benefiting 1 crore tax payers.

Besides, the government has bettered its fiscal deficit projections for the current fiscal as well as the next. The fiscal deficit for FY25 has been pegged at 4.8 per cent of GDP, lower than budgeted 4.9 per cent, while for FY26 the deficit is projected at 4.4 per cent, lower than what was given in the consolidation roadmap.