We have done our bit. That was the clear message from Reserve Bank of India Governor Sanjay Malhotra as the central bank’s monetary policy committee (MPC) slashed the policy repo rate by a surprise 50 basis points (0.50 per cent) and also announced a 100bps cut in the cash reserve ratio (CRR) of banks. With inflation expected to remain below the targeted 4 per cent this year, taking every possible step to support growth took centre stage.
With Friday’s repo rate cut, the benchmark rate at which the central bank lends money to commercial banks has now been cut in total by 100bps (1 per cent) since February to 5.50 per cent from 6.50 per cent. With that done, Malhotra has stated that there is now little space left for the RBI to support growth.
The MPC also changed its policy stance to neutral from accommodative, signalling that there may not be any significant rate cuts in the months to come.
On the inflation front, RBI has a lot of comfort. It now expects the consumer price index (CPI) inflation at 3.7 per cent in the current financial year ending March 2026, below the 4 per cent target.
It has retained its GDP growth forecast for the full year at 6.5 per cent. Governor Malhotra clearly feels that is not good enough, and hence perhaps the frontloaded steps taken on Friday on the interest rate front.
“The forecast we have made is 6.5 per cent. The aspiration is certainly much more between 7-8 per cent. We would like to grow as fast as possible,” he told reporters.
Most economists had projected a 25 basis points rate cut, so RBI’s jumbo move was clearly surprising.
“The RBI surprised on three fronts: with a 50 bps cut, CRR cut of 100 bps (between September to November), and stance change back to neutral. This effectively puts a pause on the rate-cut cycle. The focus now shifts to quick and maximum possible transmission of the 100 bps repo rate cuts till now,” pointed Suvodeep Rakshit, chief economist, Kotak Institutional Equities.
He is not expecting further rate cuts over the next few policies while watching for the evolution of global growth and domestic inflation risks.
Sonal Badhan, economist at Bank of Baroda, also expects the MPC to pause over the next two meetings at least as it evaluates the impact of the rate cuts done so far. It will also be eyeing more data on monsoon rains and growth.
“Downside risks to growth remain on account of continued geopolitical tensions and weather-related uncertainties,” said Badhan, who is expecting GDP growth in the 6.4-6.6 per cent range in 2025-26, while inflation is seen around 3.8-3.9 per cent.
“We believe that the terminal rate will remain at 5.5 per cent for some time in the near term as RBI is also cognizant of movement in real rate,” Badhan noted.
Radhika Rao, executive director and senior economist at DBS, feels that while growth momentum is weakening at the margin, this step to frontload monetary policy easing is likely a pre-emptive move to arrest further slowdown in economic activity.
Data last week showed GDP growth accelerated to 7.4 per cent in the January-March quarter, its fastest growth over the past year. However, growth is expected to slow this year. Rao is expecting the GDP to grow 6.1 per cent in 2025-26, lower than RBI’s projected 6.5 per cent.
“In the year ahead, consumption is likely to receive a hand from easing inflation and flush liquidity conditions, a timely monsoon, and income tax cuts. Other engines of growth are likely to moderate amid a weak credit impulse, a modest budgeted increase in the Centre’s fiscal spending, and global uncertainties impacting exports and the private sector capex cycle. With our forecast of the terminal rate being met, further rate reductions are likely if the growth momentum weakens anew,” she said.
Paras Jasrai, associate director at India Ratings and Research, expects there will be, at best, one more rate cut of 25bps unless growth declines sharply or there are surprises on the global economic front.
“Various multilateral agencies have revised downwards the global growth due to headwinds from tariffs led uncertainty. Although the domestic drivers remain relatively strong for India, the growth remains lower than the aspirational rate of the central bank. This is what appears to have taken major precedence at the current juncture for the central bank to provide frontloaded and aggressive cuts in the June 2025 monetary policy review,” he said.
The transmission of policy rates holds primary importance for the easing to be percolated to the economy, he added.
“The MPC has broadly addressed any concerns on the slowdown in growth on account of global uncertainties and fully capitalized on the softening domestic inflation to deliver a frontloaded rate cut, staggered durable liquidity injection yet conserving the space for future action. The policy is definitely positive for all sectors of the economy, particularly for banking and finance. In particular, lower cost of borrowing will act as a counterbalance to any uncertainty,” said State Bank of India Chairman CS Setty.
Yes Bank’s chief economist Indranil Pan says the RBI’s change of stance implies that most of the firepower that the RBI had has already been expended. But, he still sees a possibility of a last 25 bps cut, although the timing of the same is uncertain.
Nomura Economists Sonal Varma and Aurodeep Nandi point out that RBI’s shift in stance to neutral now, when they had just changed it to accommodative in April, suggests more nimble decision-making. Friday’s decisions, including the repo and CRR rate cut, apart from the stance change, suggest RBI will leave rates unchanged in August, but they clearly don’t see an end to the monetary easing cycle just yet.
“On our forecasts, GDP growth is likely to surprise lower at 6.2 per cent, while CPI inflation is tracking even lower at 3.3 per cent. Therefore, we do not view today’s action as the end of the easing cycle. We continue to see the terminal rates at 5 per cent, with a likely pause in August, followed by a 25bps rate cut in each of October and December,” said Varma and Nandi.
