The Reserve Bank of India (RBI) cut the repo rate by 25 basis points (bps) on April 9, 2025, bringing it down to 6.00%. This marks the second rate cut in recent months as the central bank shifts its focus toward stimulating economic growth amid global uncertainty and domestic economic moderation. The move has sparked widespread discussion, with analysts, investors, and borrowers weighing in on the pros and cons of this monetary policy decision.
To understand whether the rate cut is good or bad, one needs to examine the impact from multiple angles—economic growth, inflation, consumer behavior, industry sentiment, and the broader financial ecosystem.
Understanding the Repo Rate
The repo rate is the rate at which the RBI lends short-term funds to commercial banks. Changes in the repo rate influence borrowing costs across the economy. When the RBI lowers the repo rate, banks can borrow money at a cheaper rate, which often translates into lower interest rates for loans and mortgages for consumers and businesses.
A repo rate cut usually aims to boost liquidity, encourage spending, and drive economic growth—especially during periods of sluggish activity or external economic shocks.
Why Did the RBI Cut Rates?
Several factors prompted the RBI to cut the repo rate by 25 bps:
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Slowing Economic Growth:
India’s GDP growth, while positive, has moderated over the last two quarters. With global headwinds such as trade tariffs, geopolitical tensions, and weak export demand, the central bank sought to stimulate domestic consumption and investment. -
Controlled Inflation:
Retail inflation has remained within the RBI’s comfort zone of 4%, allowing room for rate cuts without immediately risking price instability. -
External Pressures:
The global economy continues to face challenges from high interest rates in developed countries and ongoing trade disruptions. These pressures have impacted India’s export sector and overall capital flows. -
Support for Rate-Sensitive Sectors:
Sectors like real estate, automobiles, and infrastructure, which depend heavily on credit, needed a boost. The RBI decided to support these industries by lowering borrowing costs.
Positive Effects of the Rate Cut
1. Lower Borrowing Costs
With the repo rate cut, banks will likely reduce lending rates on home loans, auto loans, and personal loans. This makes borrowing more attractive for consumers and businesses. People planning to buy homes, cars, or start new ventures can now access credit at lower interest rates, encouraging more economic activity.
2. Stimulus for Economic Growth
Lower interest rates increase liquidity in the system. When consumers and businesses borrow and spend more, it generates demand for goods and services. This demand leads to higher production, job creation, and investment, all of which contribute to GDP growth.
3. Boost to Rate-Sensitive Sectors
Real estate and automobile industries will likely benefit the most. These sectors faced demand challenges due to high interest rates and rising input costs. With cheaper loans, potential homebuyers and car buyers may return to the market, reviving sales and production.
4. Increased Consumer Spending
Lower EMIs increase disposable income in the hands of borrowers. With more money to spend, consumers may increase their purchases, particularly on durable goods, travel, and lifestyle expenses. This can provide a short-term lift to retail and services sectors.
5. Stock Market Reaction
Equity markets usually react positively to rate cuts. Lower interest rates reduce the cost of capital, which improves corporate profitability. This can lead to bullish sentiment in sectors like banking, infrastructure, and consumer goods.
Concerns and Drawbacks of the Rate Cut
1. Potential for Inflation
Although inflation currently remains under control, increased liquidity and demand could push prices upward. If supply fails to meet rising demand, inflation may accelerate, reducing the purchasing power of consumers. The RBI must carefully monitor price trends to avoid overheating the economy.
2. Impact on Savers
While borrowers gain from lower interest rates, savers may face reduced returns on fixed deposits, savings accounts, and small savings schemes. This especially affects senior citizens and retirees who rely on interest income. They may have to look for alternative investment options, possibly taking on more risk.
3. Transmission Delays
Banks do not always pass on the full benefit of rate cuts immediately to borrowers. Delays in transmission reduce the effectiveness of monetary policy. Past experiences show that banks take time to adjust their lending and deposit rates, citing liquidity mismatches and cost structures.
4. Pressure on Bank Margins
Banks may see a squeeze in net interest margins if lending rates drop sharply while deposit rates remain sticky. This could impact profitability, especially for public sector banks already dealing with non-performing assets and capital constraints.
5. Limited Effectiveness Against Structural Issues
A rate cut cannot solve structural problems such as low productivity, rural distress, or global trade disruptions. While monetary policy can influence short-term demand, broader reforms and fiscal measures must accompany rate actions to create long-lasting growth.
Mixed Reactions from the Market
Economists welcomed the RBI’s proactive approach but urged caution. Some experts viewed the 25 bps cut as a necessary step to support growth, especially as India navigates global volatility. Others expressed concern that too many rate cuts in a short span could lead to asset bubbles or inflationary pressures.
Industry leaders in real estate and automobiles praised the move, saying it would help revive consumer interest and lift sales. On the other hand, fund managers and fixed-income investors warned that declining interest rates could erode returns and increase portfolio risks.
Banks, too, face a delicate balancing act. They must protect their profit margins while responding to regulatory expectations to pass on the benefits of the rate cut to borrowers.
Final Verdict: Is It Good or Bad?
The repo rate cut delivers a short-term boost to the economy. It supports consumption, credit growth, and investor sentiment during a period of global uncertainty. For borrowers, it brings financial relief. For the broader economy, it injects momentum when growth faces pressure from external and domestic factors.
However, the benefits must balance carefully against risks. Rising inflation, lower returns on savings, and weaker bank margins remain real concerns. The success of the rate cut depends on how effectively banks transmit the change, how consumers and businesses respond, and how inflation trends evolve over the coming months.
Ultimately, the move reflects the RBI’s intent to prioritize growth without losing sight of stability. Whether it proves beneficial in the long run depends on supporting actions from the government, the corporate sector, and global economic conditions.
In the near term, the rate cut sends a strong message: the central bank remains committed to ensuring liquidity, lowering borrowing costs, and supporting the economy as it navigates a complex and evolving landscape.
