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The big reset: RBI front-loads rate cuts to fire up economy

The Reserve Bank of India surprised the street with an outsized 50 basis points repo rate cut and changed its stance from 'accommodative' to 'neutral' to signal limited room for future rate cuts

By Neha Bothra Forbes India Staff

Published: Jun 6, 2025 04:28:43 PM IST

Updated: Jun 6, 2025 04:35:48 PM IST

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Reserve Bank of India (RBI) governor Sanjay Malhotra arrives for a press conference after the monetary policy review at RBI headquarters in Mumbai on June 6, 2025. Image: Indranil Mukherjee / AFP

In a move aimed to bring about certainty and confidence to markets, the Reserve Bank of India announced a bigger-than-expected repo rate cut of 50 basis points, reduced the Cash Reserve Ratio (CRR) by 100 bps, even as it stiffened its policy stance to ‘neutral’ from ‘accommodative’ to signal limited room for rate cuts in the coming months.

“We could have announced CRR later but we did it today so that banks are assured of liquidity,” RBI governor Sanjay Malhotra said. “The more certainty we have, the stronger our macros will be.” He also claimed that the central bank had won the war against inflation. “But there is scope to push the GDP rate further.” This is why five out of the six members of the rate-setting panel decided to front-load the rate cut. Only Saugata Bhattacharya voted for a 25 basis points cut in the repo rate in the June meeting.

The Monetary Policy Committee was clear that future rate cuts would be data dependent since it had already reduced the benchmark rate by 100 basis points in the current calendar year to 5.5 percent after maintaining status quo at 6.5 percent since February 2023. It had changed its policy stance from 'withdrawal of accommodation' to 'accommodative' in the April monetary policy meeting.

“Under the current circumstances, monetary policy is left with very limited space to support growth,” Malhotra explained. “From here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance.”

Rahul Goswami, CIO & MD, India Fixed Income, Franklin Templeton, points out that by reverting its stance to neutral, the RBI signals that it may now pause to assess the full transmission of these cuts before considering further action.

Foreign brokerage firm Nomura does not view today’s policy action as the end of the easing cycle. “We continue to see the terminal rates at 5 percent with a likely pause in August, followed by 25 basis points rate cut in each of October and December,” its analysts note.

Abhishek Bisen, head-fixed income, Kotak Mahindra AMC, says that there is scope for another 25-basis points rate cut in this cycle. “The timing of the cut is uncertain though,” he adds. “Headwinds continue to be from global variables with uncertainty of US tariffs and a tense geopolitical situation in parts of the world.”

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

The RBI observed that the uncertainty around the global economic outlook had relatively ebbed, and market volatility had eased with equity markets staging a recovery with a better dollar index and softening crude oil prices, since the previous MPC meeting in April. 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. The RBI retained its GDP growth outlook for FY26 at 6.5 percent.

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 a deflationary zone for three months straight.

Assuming a normal monsoon, the central bank revised its retail inflation forecast from 4 percent to 3.7 percent for FY26. It predicts CPI inflation at 2.9 percent, 3.4 percent, 3.9 percent, and 4.4 percent for Q1, Q2, Q3, and Q4 each.

“The inflation outlook for the year is being revised downwards but growth, on the other hand, remains lower than our aspirations amidst a challenging global environment and heightened uncertainty,” Malhotra highlighted. “It is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum,” he added. “This changed growth-inflation dynamic calls for not only continuing with the policy easing but also frontloading the rate cuts to support growth.”

Tribhuwan Adhikari, MD & CEO of LIC Housing Finance, believes the policy announcements will lead to a surge in home loan demand, particularly in the affordable housing segment. “We expect a good boost in the housing demand July onwards, and are optimistic that this year will be good for the housing finance industry.”

RBI reduced the CRR by 100 basis points to 3 percent of net demand and time liabilities in a staggered manner during the course of the year in a bid to reiterate its commitment to provide sufficient liquidity to banks. It said this reduction would be carried out in four equal tranches of 25 basis points each with effect from September 6. This would release primary liquidity to the tune of Rs 2.5 lakh crore to the banking system by December 2025 and can potentially reduce the cost of funding of the banks.

“The comfortable liquidity surplus in the banking system has further reinforced transmission of policy repo rate cuts to short-term rates,” Malhotra stated. “However, we are yet to see a perceptible transmission in the credit market segment, though we must keep in mind that it happens with some lag.”

Madhavi Arora, chief economist, Emkay Global, believes the RBI may have front-loaded all policy actions in the June meeting. “All of that now implies that the ball is in the banks’ court to transmit easier financial conditions faster.”

After remaining in deficit since mid-December, there was surplus liquidity of Rs 1.71 lakh crore in May versus 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 in the system.

Yields on 10-year G-Secs have declined to around 6.22 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,” Bank of Baroda’s chief economist Madan Sabnavis says.

RBI's liquidity bonanza brought cheer to equity investors on Dalal Street. The BSE Sensex was trading 0.92 percent higher at 82,192 points at 3pm on Friday.