The Reserve Bank of India (RBI) cut its key repo rate for the first time in nearly five years on Friday to provide stimulus to the sluggish economy, which is expected to grow at its slowest pace in four years in the current fiscal year.

The Monetary Policy Committee (MPC), which consists of three RBI and three external members, cut the repo rate (INREPO=ECI), opens new tab by 25 basis points to 6.25% after having kept it unchanged for eleven straight policy meetings.

The decision was in line with a Reuters poll, where 70% of economists had predicted a quarter-point reduction, and marked the first reduction in India's key rate since May 2020.

All six MPC members voted to cut the repo rate and to maintain the monetary policy stance at "neutral".

The MPC noted that though growth is expected to recover, it is much lower than last year and inflation dynamics have opened space for rate easing, RBI Governor Sanjay Malhotra said in the first policy review since his appointment in December.

The multiple line chart shows India's retail inflation, quarterly GDP growth rate and the central bank's repo rate one below the other.

India's government has forecast annual growth of 6.4% in the year ending in March, below the lower end of its initial projection, weighed by a weaker manufacturing sector and slower corporate investments. Growth is seen in a 6.3%-6.8% range in the next fiscal year as well.

The central bank forecast growth of 6.7% next year.

Improving employment conditions, recently announced tax cuts, moderating inflation and good agricultural output after a strong monsoon will help growth, Malhotra said.

Though retail inflation is still well above the medium-term target of 4%, it eased to a four-month low of 5.22% in December and is seen gradually declining towards the target in coming months.

The central bank sees inflation averaging 4.8% in the current financial year, easing to 4.2% next year.

Food inflation pressures are expected to ease, Malhotra said, but added that volatility in energy prices pose a risk to the inflation outlook.

India's benchmark 10-year bond yield was up four basis points at 6.69% after the announcement, while the rupee rose to 87.38. The benchmark equity indexes gained 0.2% each following the announcement.