Central banks worldwide reduced interest rates last year, but India kept its rates high due to persistent inflation. Now, New Delhi is focusing on stimulating urban consumption, which has been a key driver of the country's economic growth.

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

While central banks worldwide reduced interest rates last year, India maintained higher rates due to persistent inflation concerns.

The Reserve Bank of India (RBI) announced that its lending rate to commercial banks would decrease by 25 basis points, bringing it down to 6.25%. Retail inflation had dropped to 5.22%, though it remained above the bank's target of 4%. The last time the RBI cut interest rates was in May 2020.

India's economy grew slower than expected in the fourth quarter of 2024, primarily due to weak consumer spending and sluggish manufacturing activity. While the economy expanded by 8% last year, the RBI projects a growth rate of 6.7% for the coming year.

RBI Governor Sanjay Malhotra stated that inflation is expected to decline further in 2025 and 2026. He suggested that the bank is now focusing more on stimulating economic growth. "Considering the existing growth-inflation dynamics… a less restrictive monetary policy is more appropriate at this current juncture," Malhotra said.

The rate cut follows the federal government's recent decision to introduce income tax reductions in its annual budget, aiming to boost consumer spending.

India's economic growth had been slowing in recent months, mainly due to declining urban consumption. Many urban consumers had been spending less because their wages had not kept pace with high inflation and elevated tax rates.

In January 2024, Indian Prime Minister Narendra Modi launched the "Viksit Bharat" initiative, outlining a vision to transform India into a developed nation within the next two decades.