RBI rate cut: Not a question of 'if' but 'how much'

The RBI's rate-setting panel will begin its three-day meeting today. Most economists and analysts expect a repo rate cut of at least 25 basis points to be announced on Friday. Here's why

By Neha Bothra Forbes India Staff

Published: Jun 4, 2025 11:15:22 AM IST

Updated: Jun 4, 2025 11:26:06 AM IST

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RBI governor Sanjay Malhotra Image: Reuters /Francis Mascarenhas

The Indian economy is in a Goldilocks situation. There is steady economic growth, but not ‘too much’ that could stoke inflation. It is in such times that the Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) will meet for its bi-monthly credit policy deliberations between June 4 and 6. The general consensus on the street is that the rate-setting panel will deliver a third consecutive repo rate cut of at least 25 basis points while retaining an accommodative stance.

The RBI slashed the repo rate by 50 basis points in the current calendar year to 6 percent, after maintaining status quo since February 2023 at 6.5 percent. It also changed its policy stance from 'withdrawal of accommodation' to 'accommodative' in its April monetary policy meeting.

“We expect the MPC to maintain its focus on supporting the ongoing recovery in the growth momentum,” say economists at Care Ratings. “Falling inflation will give the RBI the flexibility to prioritise growth amid external headwinds.” It expects the MPC to reduce benchmark rates by another 50 basis points in the current fiscal and doesn’t rule out the possibility of a deeper rate cut cycle if growth falters.

Tanvee Gupta Jain, chief India economist, UBS Securities, expects the central bank to slash rates by an additional 50-75 basis points this year given softer inflation. She sees the terminal rate at 5.5 percent. “India's macro stability risks remain relatively contained,” Jain says. “With the global backdrop remaining uncertain, we expect monetary policy to continue to do the heavy lifting to support India's growth momentum.”

In fact, in a report earlier this week, the State Bank of India (SBI) said the MPC could surprise the street with a bigger than expected rate cut: “We expect a 50-basis point rate cut in the June policy as a large rate cut could reinvigorate the credit cycle.” SBI believes cumulative rate cuts in this cycle could be 100 basis points. “Domestic liquidity and financial stability concerns have receded. Inflation is expected to stay within tolerance band,” SBI Research analysts add. “Keeping the domestic growth momentum intact should be the main policy focus and provides the justification of a jumbo rate cut.”

The Indian economy grew by 7.4 percent in Q4FY25—the highest in the past four quarters. This was largely supported by improvement in the pace of construction, service activities, and seasonal tailwinds from the Mahakumbh and the marriage season. But, on the demand front, private consumption moderated to 6 percent from 8.1 percent in the previous quarter, and the outlook for urban demand remains mixed. Overall, economic activity, partly due to base effect, slowed down from 9.2 percent in FY24 to 6.5 percent in FY25.

Also read: RBI annual report: Indian economy in the fast lane

UBS Securities has revised its FY26 GDP growth forecast by 40 basis points to 6.4 percent. “We expect household consumption growth to pick up and become broad based as rural consumption gathers pace on hopes of a favourable monsoon and lower food prices and urban demand improves on policy stimulus such as income tax relief, softening inflation and rate cuts.”

The central bank’s long battle to rein in inflation—within its target of 4 percent with a margin of plus or minus 2 percent—has borne results for anxious policymakers. In April, retail inflation cooled off to nearly a five-year low of 3.2 percent. In effect, headline inflation has been below 4 percent for three consecutive months, aided by the sustained decline in the price levels of food and beverages, which dropped from a peak of 9.7 percent in October 2024 to 2.1 percent in April. Also, vegetable prices have been in deflationary zone for straight three months.

“Encouraging prospects for agricultural production, the arrival of fresh Rabi harvest, and comfortable reservoir levels are positives for food inflation,” say Care Ratings’ economists. “IMD’s projection of an above-normal monsoon should support robust growth in agricultural output.”

In the annual report, released last week, the central bank reiterated its commitment to boost growth since inflation is under control. “The benign inflation outlook and moderate growth warrant monetary policy to be growth supportive, while remaining watchful about the rapidly evolving global macroeconomic conditions,” it noted in its annual report.

The April policy outcome was against the backdrop of liquidity concerns in the banking system. The central bank had pointed out that the policy stance should not be directly associated with the liquidity situation. While RBI governor Sanjay Malhotra agreed the monetary policy decision will have implications for liquidity management, he assured the central bank will undertake measures to keep liquidity is surplus to ensure speedy transmission of the rate cuts. This commitment was reiterated in the RBI annual report.

System liquidity, on average, remained in surplus in May at Rs 1.71 lakh crore versus a surplus of Rs 1.40 lakh crore in April. Measures undertaken by the RBI, such as daily Variable Rate Repo auctions and Open Market Operations, helped boost liquidity. “We expect the RBI to maintain comfortable liquidity in the coming months as well,” says Bank of Baroda’s chief economist Madan Sabnavis. “We expect the RBI to keep its ‘accommodative’ stance unchanged in the June policy.”

Moreover, since the April policy, yields on 10-year G-Secs have declined by 18 basis points to around 6.26 percent against 6.48 percent about two months ago. “Limited central government borrowing, buyback of securities, RBI’s liquidity support measures, prospects of inflation remaining under control given the normal monsoon outlook, and subdued global cues, will give yields a downward bias going forward,” Sabnavis adds.

Importantly, according to economists, despite a repo rate cut of 50 basis points, RBI’s liquidity easing measures have effectively eased rates by nearly 75 basis points since February, enabling the overnight rates to drop closer to the lower end of the corridor. Given the surplus of liquidity in the system, analysts expect a smoother transmission of the rate cuts. “Easing money market rates may prompt the RBI to take incremental steps in policy easing, reducing the likelihood of a larger rate cut in this meeting,” say economists at Care Ratings.