RBI Cuts Repo Rate by 25 Basis Points to 6.0% as Inflation Cools
The RBI cut its repo rate by 25 basis points to 6.0% as headline inflation fell to 4.2%, providing relief to borrowers and supporting economic growth momentum.
Second Cut in the Current Easing Cycle
The Reserve Bank of India's Monetary Policy Committee voted 4-2 to reduce the benchmark repurchase rate by 25 basis points to 6.0% on February 7, the second cut since the easing cycle began in December 2025. The standing deposit facility rate was adjusted to 5.75%, and the marginal standing facility rate to 6.25%.
Governor Sanjay Malhotra said the decision reflected "a favorable inflation trajectory and the need to support growth in an uncertain global environment." The MPC retained its neutral policy stance, signaling that further cuts remain possible but are not predetermined.
Inflation Returns to Target
Headline consumer price inflation fell to 4.2% year-over-year in January, within the RBI's 2% to 6% target band and down from 5.5% in October. Food inflation, which had been the primary driver of price pressures, moderated to 6.1% from 9.8%, reflecting improved vegetable and cereal supplies following a better-than-expected rabi harvest.
Core inflation, excluding food and fuel, remained subdued at 3.4%, the lowest level since 2020. The RBI revised its full-year inflation projection for FY2026 to 4.4% from 4.8%, citing declining global commodity prices and stable domestic food stocks.
Growth Considerations
The RBI maintained its GDP growth forecast for FY2026 at 6.6% but flagged downside risks from slowing global trade and reduced demand from key export markets. Private consumption growth, projected at 6.2%, is expected to benefit from lower borrowing costs and reduced EMI (equated monthly installment) burdens on housing and personal loans.
"The rate cut is timely," said Pranjul Bhandari, chief India economist at HSBC. "India's growth is increasingly domestically driven, and lower rates will support consumption and investment at a time when external demand is softening."
Banking Sector Response
Major banks moved quickly to pass on the rate cut. State Bank of India reduced its benchmark lending rate by 25 basis points, effective February 15. HDFC Bank and ICICI Bank announced similar reductions. The weighted average lending rate on new rupee loans is expected to fall to approximately 9.2% from 9.5%.
Housing loan demand has already shown signs of recovery, with application volumes at HDFC Bank rising 14% quarter-over-quarter in the October-December period. Real estate developers reported improved buyer sentiment, particularly in the affordable housing segment priced below 45 lakh rupees ($53,000).
Rupee and Bond Market
The rupee strengthened marginally to 84.80 per dollar following the announcement, supported by foreign portfolio inflows of $1.2 billion into equity markets during the first week of February. The 10-year government bond yield fell 6 basis points to 7.05%, its lowest level since September 2024.
Foreign investors have increased their holdings of Indian government bonds to $28 billion following the country's inclusion in the JPMorgan Emerging Market Bond Index, providing a structural demand base that has helped cap yields despite the RBI's easing.
Outlook
Markets are pricing in one more 25-basis-point cut by June, which would bring the repo rate to 5.75%. Economists at Goldman Sachs expect the terminal rate in this cycle to reach 5.5% by early 2027, depending on the inflation trajectory and the Federal Reserve's policy path.
