RBI Lowers Policy Rate by 25 bps to 6.25% in First Cut in Five Years

The RBI, under new Governor Sanjay Malhotra, on Friday reduced interest rate for the first time in nearly five years as the central bank shifted its policy stance to support a shuttering economy.

The interest rate reduction of 25 basis points to 6.25 percent follows the last cut in May 2020. The rates were last revised in February 2023.

The policy rate was increased by 25 basis points to 6.5 percent on that occasion.

The MPC decided by consensus to reduce the policy rate by 25 basis points to 6.25 per cent," Malhotra said.

This interest rate cut comes a week after Finance Minister Nirmala Sitharaman provided the biggest tax break to the middle class in Budget 2025-26, which was an attempt to boost consumption after the economy had slowed to its lowest pace since the pandemic.

The rate hike cycle was halted in April 2023, six consecutive hikes in a row 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 a slew of measures, including significant income tax cuts for the middle class, which will benefit 1 crore tax payers.

In addition, the government has also improved its fiscal deficit projections for the current fiscal as well as the next one. While the fiscal deficit for FY25 has been pegged at 4.8 percent of GDP, lower than budgeted 4.9 percent, for FY26 the deficit is projected at 4.4 percent, lower than what was given in the consolidation roadmap.