RBI rate cuts: What took so long to back a reforming India?

This article is authored by Prof. Vidhu Shekhar, Assistant Professor of Finance and Accounting at S.P. Jain Institute of Management and Research (SPJIMR).

In 2021, India added over 40 unicorns, startups valued at over a billion dollars, more than in any year in its history. This was not merely a function of innovation or venture enthusiasm. It coincided precisely with the period when the Reserve Bank of India had reduced the repo rate to 4 per cent, the lowest in modern Indian monetary history. The monetary easing in response to COVID-19 briefly aligned India’s capital cost with the global norm. The result was a flourishing of capital formation and an entrepreneurial explosion.

But that window closed quickly. By 2023, unicorn creation had dropped to just two. In 2024, the number barely improved to seven. As of mid-2025, only two new unicorns have been added. The trend is clear: the cost of capital is a foundational driver of economic acceleration, and in India, monetary policy has often been the bottleneck.

This is not a new pattern. From 2011 to 2014, India averaged one unicorn per year. In 2015, new unicorns rose to three. In 2018 and 2019, as rates neared 6 per cent, the numbers started touching 10 new additions. Then came 2020 and 2021, and the startup ecosystem erupted. India now has 119 unicorns. Lower capital costs released a wave of risk appetite.
The evidence, though anecdotal, underscores how deeply central bank rates shape economic outcomes.

For global numbers, there are over 300 unicorns in China and more than 700 in the United States, both powered by a decade of near-zero interest rates and government-backed liquidity.

Capital at a premium
India, by contrast, has consistently been an island of expensive capital in a sea of monetary largesse. When the rest of the world was lending at or near zero and, in some cases, even subsidising capital through negative real rates, India maintained a 6 to 8 per cent repo regime for most of the decade. MSMEs in India borrow at 11 to 16 per cent effective rates. In China, the equivalent rates are closer to 3 to 4 per cent, often lower, even negative rates, when state policy loans are included. How can Indian manufacturers, exporters, and innovators compete in this asymmetry?

This reveals a deeper philosophical flaw. Capital is not a natural resource. Its cost is a policy variable to be tuned to match the needs of the economy. Yet India’s monetary policy has treated capital as if it were finite and sacred, guarded with orthodoxy, meted out sparingly, and kept expensive even when inflation was tamed and growth needed fuel.

This policy error stands in contrast to the decade-long record of economic stewardship by the government. Over the past ten years, the macroeconomic landscape has undergone a structural transformation. Inflation has averaged under 5 per cent since 2016. Fiscal deficits have fallen consistently, with FY26 targeting 4.5 per cent. Foreign exchange reserves are above 600 billion dollars, and tax buoyancy has improved dramatically with GST and digital compliance. External vulnerabilities have narrowed. India now runs a stable current account, has a robust inward FDI pipeline, and is on the cusp of global supply chain integration.

A monetary lag
And yet, the RBI did not pivot. After a brief post-COVID easing cycle, it reversed course with aggressive rate hikes, even when inflation was supply-side driven and core inflation showed signs of stabilising. The 2022 to 2023 tightening was arguably disproportionate to the domestic context. Even as inflation fell below 5 per cent and fiscal conditions remained under control in 2024, the RBI stood pat. The result was a damaging mismatch. A fiscally responsible government worked to grow the economy, while the monetary arm constrained it with punitive capital costs.

This divergence contradicts both global evidence and logical causality. A decade of ultra-low interest rates in the West did not lead to persistent inflation. Meanwhile, the inflation spike of 2021 and 2022 globally was directly correlated with fiscal stimulus, which in some advanced economies exceeded 20 per cent of GDP, far more than anything India attempted. If inflation is fundamentally a fiscal phenomenon, and India’s fiscal policy has been sound, then what exactly was the RBI defending against?

The answer may lie in institutional legacy. Since the inflation-targeting regime began in 2016, the RBI has erred heavily on the side of caution. It has by far prized inflation control over growth and credibility over responsiveness. But this conservatism has had a cost. It resulted in lost investment cycles, weakened private capex, and a slower startup ecosystem. For all of India’s growth aspirations, the central bank remained reluctant to play its enabling role.

A window opens
This is now changing. Under new Governor Sanjay Malhotra, the RBI has executed three consecutive rate cuts in 2025, including a bold 50 basis point move in June, bringing the repo rate to 5.5 per cent. This shift is not just technical. It is philosophical. It signals a move away from reflexive hawkishness toward calibrated support for growth. It also reflects a recognition that with core inflation below 4 per cent and external pressures easing, there is room to manoeuvre.

Is it too late? Perhaps for the markets. The delayed easing, combined with global uncertainties, means equity indices and credit spreads may not respond with the same exuberance. But for the broader economy, especially MSMEs and investment-led sectors, the impact will begin to emerge in the next two quarters. For the true growth unlock, however, the repo rate needs to move below 5 per cent. This is a level consistent with India’s inflation and fiscal profile and more aligned with global capital flows.

India has earned the right to cheaper capital. The fiscal house is in order. The inflation dragon has been tamed. The world sees India as a stable investment destination. It is now incumbent upon the RBI to sustain its 2025 pivot, not as an emergency measure, but as a structural repositioning.

Because when the cost of capital aligns with the ambition of the economy, the results are not just statistical. They are transformational.

Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ