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India's Reserve Bank (RBI) is expected to reduce its key benchmark interest rate as inflation has eased. Analysts predict the RBI will lower the repo rate by 0.25% to 6.25%, marking the first rate cut in almost five years.
Why Cut Rates Now?
The easing of inflation gives the RBI the opportunity to boost the economy. In December, inflation was at 5.22%, within the RBI’s tolerance range. However, the country’s economic growth projections have weakened, leading the RBI to adopt a more accommodative approach to support growth. The government has reduced its GDP forecast for the fiscal year to 6.4%, down from 7.2%.
Challenges for India’s Economy
Despite easing inflation, India faces challenges, especially with a weakening rupee, which has fallen 3.6% against the dollar since November. A rate cut could worsen this situation, causing more inflation and capital outflows. The RBI has already stepped in to stabilize the rupee. Additionally, there are concerns over potential U.S. tariffs, as India’s trade surplus with the U.S. remains high.
While these risks persist, the RBI is expected to prioritize domestic economic growth. The rate cut could be the start of a series of gradual reductions to support the economy while keeping inflation in check.
