Central banks around the world cut interest rates last year, with India maintaining higher rates due to lingering inflation. New Delhi now aims to boost urban consumption, which had been a motor of the country’s growth.

India’s central bank cut interest rates on Friday for the first time in nearly five years.

Central banks around the world cut interest rates last year. India maintained high rates due to lingering inflation.

What do we know about the rate cuts?

The Reserve Bank of India (RBI) said the level at which it lends to commercial banks would be reduced by 25 basis points to 6.25%.

Retail inflation dropped to 5.22%, but was still above the bank’s target of 4%.

The RBI’s last interest rate cut was in May 2020.

The Indian economy expanded slower than expected in the fourth quarter of 2024 due to low consumption and slow manufacturing.

Last year, India’s economy grew at a rate of 8%. The RBI forecast growth of 6.7% next year.

RBI Governor Sanjay Malhotra said that inflation was expected to continue decreasing in 2025 and 2026 and suggested that the bank was now prioritizing spurring growth.

“Considering the existing growth-inflation dynamics… a less restrictive monetary policy is more appropriate at this current juncture,” Malhotra said.

Tax breaks aim to boost consumption

The RBI’s announcement comes days after the federal government unveiled income tax cuts in its annual budget.

India’s economic growth had been slowing over the past few months, largely due to a drop in urban consumption.

Urban Indians had been spending less because wages hadn’t kept pace with high inflation and high taxes.

In January 2024, Indian Prime Minister Narendra Modi announced his “Viksit Bharat” plan to transform India into a developed country over the next two decades.