Mumbai: The Reserve Bank of India (RBI) has reduced the interest rate for the first time in almost five years. The new Governor, Sanjay Malhotra, announced a 25 basis points (bps) cut, bringing the rate down to 6.25 percent .

The last time RBI cut rates was in May 2020. The most recent rate change tyood effect in February 2023, when it was increased to 6.5 percent.

The Monetary Policy Committee (MPC) decided unanimously to lower the rate, Malhotra said.

Why Was the Rate Cut?

This decision comes just days after Finance Minister Nirmala Sitharaman presented the Budget 2025-26, which included major tax breaks for the middle class to boost spending. The economy has been slowing down, and the government wants to boost more growth.

RBI had paused rate hikes in April 2023 after increasing them 6 times since May 2022, totaling 250 basis points. The last hike was in February 2023.

Government Support for the Cut

After the Budget was announced, the Finance Ministry suggested that fiscal policy (government spending) and monetary policy (interest rates) go together. This was a clear sign that the RBI should cut rates to support economic growth.

Finance Secretary Tuhin Kanta Pandey also said the government has taken steps to reduce the fiscal deficit and presented a budget that won’t increase inflation. He hoped the RBI would help by lowering interest rates.

What the Budget 2025-26 Offers

The Budget includes big tax cuts for the middle class, benefiting one crore taxpayers.

It also improved the fiscal deficit projections:

For the Fiscal year 2025, the deficit is set at 4.8 percent of GDP, lower than the earlier estimate of 4.9 percent. For FY26, it is expected to be 4.4 percent , better than previous targets.

This interest rate cut is expected to make loans cheaper, help boost businesses and peope to borrow and spend more, and help the economy grow.

The central government has projected a full-year fiscal deficit of 4.8 percent of Gross domestic product for the current financial year, aiming to cut  it to 4.4  percnet in 2025-26. The latest monetary policy decision is anticipated  to complement fiscal steps in driving economic recovery and making sure  the financial stability in the coming months.