India’s central bank has lowered its interest rates by half a percent, marking the third consecutive cut, to stimulate domestic consumption and investment amid rising global uncertainties. Reserve Bank of India (RBI) Governor Sanjay Malhotra explained that growth is “lower than our aspirations” and the bank felt it was “imperative to stimulate domestic consumption and investment”. The repo rate now stands at 5.5%, the lowest in three years, influencing borrowing costs for home and car loans.
The rate cut comes after two previous reductions in April and February. India’s economy grew by 6.5% in the previous financial year ending March, although growth has sharply dropped from the 9.2% high recorded in financial year 2023-24. Retail prices have slowed faster than expected to 3.16% in April, below the RBI’s 4% target, driven by falling food prices.
The central bank has changed its monetary policy stance from “accommodative” to “neutral”, indicating that further rate cuts will depend on how India’s growth-inflation dynamic evolves. Malhotra’s decision aims to boost economic activity amid global uncertainties. With inflation forecast to remain low, the RBI is likely to keep rates low to support growth.
Impact on Various Sectors
Lower borrowing costs could positively impact growth due to:
Improved Household Purchasing Power: increased disposable income for households.
Lower Input Costs for Companies: reduced costs for businesses, potentially boosting investment.
Lower Debt Servicing Costs for the Government: decreased burden on government finances
The real estate sector is also expected to benefit, with Anuj Puri, chairman of ANAROCK Group, stating that the rate cut “effectively lowers the cost of borrowing, making home loan EMIs easier on the pocket and thereby directly improving affordability for buyers”. This could potentially boost demand in the Indian real estate sector, especially in affordable and mid-income segments.