RBI reduced the Repo Rate by 0.25% and lowered the Growth Forecast to 6.5% – Key Highlights and Challenges for Investors

The Reserve Bank of India’s Monetary Policy Committee (MPC) cut the repo rate by 25 basis points to 6% on Wednesday, 9th April 2025. At the same time, it revised the growth projection for FY2026 down to 6.5% from the earlier estimate of 6.7%, citing uncertainties stemming from trade wars triggered by the US imposing reciprocal tariffs.

While announcing the monetary policy, RBI Governor Sanjay Malhotra stated that trade tariff measures have increased global economic uncertainty, creating fresh challenges for growth and inflation worldwide. He cautioned that these tariffs could hinder India’s economic growth and negatively affect net exports. However, Sanjay Malhotra noted that the impact on domestic inflation is expected to be limited, thanks to the decline in commodity and crude oil prices.

RBI’s recent Regulatory Decisions 2025

1. Securitisation of Stressed Assets

The RBI, after considering stakeholder feedback, will soon introduce a draft framework for securitising stressed assets. This aims to facilitate a market-driven method for asset securitisation, complementing the existing ARC route under the SARFAESI Act, of 2002.

2. Co-lending Arrangements

The RBI plans to broaden the scope of co-lending by issuing a general regulatory framework for all co-lending arrangements among regulated entities. Currently, the rules apply only to partnerships between banks and NBFCs for priority sector lending.

3. Non-fund Based Facilities

The RBI intends to unify and update the rules governing non-fund-based (NFB) facilities like guarantees, letters of credit, and co-acceptances. These instruments are vital for efficient credit intermediation and smooth business transactions, including trade-related ones. The updated guidelines will also review credit enhancement practices to support infrastructure financing.

4. Enhancing UPI Transaction Limits

To better support evolving user needs, the RBI has suggested that NPCI, in collaboration with banks and other UPI stakeholders, may review and update UPI transaction limits. Currently, both person-to-person (P2P) and person-to-merchant (P2M) payments are capped at ₹1 lakh, with exceptions for certain P2M cases allowing limits of ₹2 lakh and ₹5 lakh. The ₹1 lakh cap remains for P2P payments.

5. ‘On Tap’ Regulatory Sandbox

The RBI has proposed making the Regulatory Sandbox “Theme Neutral” and available “On Tap.” This move aims to promote continuous innovation and adapt to the fast-changing FinTech environment. Since its launch in 2019, four specific thematic sandbox cohorts have been introduced and completed.

6. Stricter Guidelines for Gold Loans

The RBI is set to introduce more stringent regulations governing gold loans. These new rules aim to ensure that lenders follow responsible and transparent lending practices, particularly when dealing with loans secured against gold. The updated framework will focus on protecting borrowers’ interests, promoting fair valuation of gold, ensuring proper disclosure of terms, and preventing over-lending or mis-selling.

Key Highlights and Insights from the RBI’s April 2025 Policy

1. Policy Announcements:

• The repo rate has been reduced by 25 basis points to 6%.
• The monetary policy stance remains ‘Accommodative’.
• The Standing Deposit Facility (SDF) rate has been brought down to 5.75%.
• The Marginal Standing Facility (MSF) rate is now at 6.25%.
• All members of the Monetary Policy Committee (MPC) unanimously supported the repo rate cut.

2. GDP Growth Projections:

• The RBI has revised its GDP growth forecast for FY26 to 6.5%, down from 6.7% previously.
• Quarterly growth estimates are as follows:
  • Q1 FY26: 6.5%
  • Q2 FY26: 6.7%
  • Q3 FY26: 6.6%
  • Q4 FY26: 6.3%

3. Inflation (CPI) Outlook:

• The Consumer Price Index (CPI) inflation projection for FY26 has been lowered to 4% from the earlier 4.2%.
• Quarterly CPI estimates:
  • Q1 FY26: 3.6%
  • Q2 FY26: 3.9%
  • Q3 FY26: 3.8%
  • Q4 FY26: 4.2%

4. Current Account Deficit (CAD) Remains Manageable

The RBI Governor expressed confidence that robust net services exports and steady remittance inflows will help offset the trade deficit. He highlighted that India’s services exports—particularly in software, business, and transport—remained resilient in early 2025.

Given these trends, the current account deficit (CAD) for both FY25 and FY26 is projected to remain within manageable and sustainable limits.

Revised Repo Rate Impact on the Borrowers and Investors

1. Lower Loan EMIs: With the repo rate cut, banks may reduce their lending rates, making home, auto, and personal loans more affordable for borrowers.

2. Decline in Deposit Returns: Savings instruments like fixed deposits might offer slightly lower interest rates as banks adjust to the new policy rate.

3. Positive Market Reaction: Sectors such as banking, real estate, and automobiles may benefit from the rate cut, often boosting stock market sentiment.

4. Revisiting Investment Plans: Investors may need to rebalance their portfolios—considering a mix of equities and fixed-income options—to adapt to a softer interest rate environment.

Why did RBI reduce the repo rate in 2025?

Rising Global Trade Pressures – The U.S. has introduced steep tariffs, including a 104% duty on Chinese goods, creating uncertainty in international trade and disrupting global supply chains.

Impact on Indian Exports – Sectors like gems, chemicals, and pharmaceuticals—major contributors to India’s exports—are feeling the pinch from these trade barriers, leading to a noticeable dip in export performance.

Domestic Economic Concerns – India is also grappling with internal challenges such as inconsistent rural demand and the need to strengthen domestic consumption to drive sustainable growth.

Final thoughts

The RBI’s recent decision highlights its effort to strike a balance between boosting economic growth and managing inflation. For individuals, this may translate into more favorable loan options, but it also calls for a review of fixed-income investment plans. Staying informed about future monetary policy updates and adjusting financial goals in line with changing interest rates remains important.

Sources : msn.com