RBI opts for another rate cut

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announced its Monetary Policy Statement on June 6, 2025, opting for rate cuts.

The key policy rate (repo rate) was reduced by 50 basis points to 5.50 percent, adjusting the Standing Deposit Facility (SDF) rate to 5.25 percent and the Marginal Standing Facility to 5.75 percent.

The decision aims to achieve a medium-term CPI inflation target of 4 percent with a band of +/- 2 percent while promoting growth, leading to a change in MPC’s stance from accommodative to neutral.

Real GDP growth

The National Statistical Office (NSO) released provisional estimates showing a 6.5 percent real GDP growth and 6.4 percent real GVA growth for the fiscal year 2024-25.

Economic activity in 2025-26 is expected to be driven by private consumption, fixed capital formation, and strong rural demand, with improvements in investment activity. However, geopolitical tensions and global trade uncertainties pose challenges to growth.

Inflation

Inflation rates have been decreasing, with the CPI inflation rate reaching a six-year low of 3.2 percent in April 2025. The inflation outlook is favourable due to record wheat production, higher pulse production, and expectations of a normal monsoon. The CPI inflation rate for 2025-26 is projected at 3.7 percent, with risks balanced evenly.

MPC opts for a rate cut

The MPC’s decision to reduce the repo rate by 50 basis points aims to stimulate domestic consumption and investment to boost growth. The policy repo rate has been cut by a total of 100 basis points since February 2025. The MPC’s stance has changed from accommodative to neutral, with a focus on balancing growth and inflation.

Impact on economy

The lower interest rate (or) rate cut means there will be cheaper loans for homebuyers, auto buyers and businesses. The rate cut is expected to help lower monthly loan payments (or) EMI for the public.

Reduction in CRR

The RBI governor announced a reduction in the Cash Reserve Ratio (CRR) by 100 basis points to 3.0 percent of net demand and time liabilities (NDTL) in a staggered manner, releasing liquidity into the banking system. The reduction in CRR, along with adjustments in the Bank rate (reduction of 50 basis points), is expected to increase liquidity in the economy.

Conclusion

The consecutive rate cuts reflect the RBI’s focus on controlling inflation while supporting economic growth. However, the time lag between policy measures and outcomes should not be overlooked. The increase in liquidity may lead to money inflation and subsequent price inflation, raising concerns about the impact on the economy. The change in stance means there may not be any further rate cuts this year – though depends on the economic situation.