On February 7, 2025, the Reserve Bank of India announced a 25 basis point reduction in the benchmark repo rate to 6.25%, marking the first rate cut since May 2020, aimed at addressing the dual challenges of slowing economic growth and increasing global risks. This resolution was unanimously passed by the Monetary Policy Committee led by the newly appointed Governor Sanjay Malhotra, and maintains a "neutral" policy stance to retain flexibility in responding to market fluctuations in the future.

Reason for interest rate cut: India's economic growth rate continues to be weak, and the GDP growth forecast for fiscal year 2025 has been significantly lowered from 7.2% to 6.4%, hitting a four-year low; At the same time, inflationary pressures have significantly eased, with the retail inflation rate falling to 5.22% in December, close to the medium-term target of 4%, providing room for interest rate cuts.

Risk and Challenge: The rupee against the US dollar has depreciated by 3.6% since November 2024, hitting a historic low. Interest rate cuts may exacerbate external and imported inflationary pressures. In addition, the uncertainty of US trade policy (India's trade surplus with the US exceeds $43 billion in 2023) and global geopolitical risks require central banks to carefully balance stimulating the economy with maintaining financial stability.

Future outlook: The market expects the Reserve Bank of India to initiate a 'small rate cut cycle', with Goldman Sachs predicting another 25 basis point rate cut in April. Analysis suggests that the policy orientation of the newly appointed governor and the reform of inflation tools will affect the subsequent path, while the depreciation of the rupee and external environment remain key constraints.