Mumbai: In a move to invigorate India’s slowing economy and in the wake of consistently easing inflation, the rate-setting committee of India’s central bank slashed the repo rate by 50 basis points (bps) on Friday, twice the 25 bps that was widely expected. Further it complemented the policy rate cut with a 100 bps reduction in the cash reserve ratio (CRR). A basis point is one-hundredth of a percentage point.
“Inflation is under a lot of control now, and we can accept that we have won the war,” RBI governor Sanjay Malhotra said at a media briefing on Friday following the MPC meeting, adding that the central bank has reduced inflation projection for FY26 to 3.7% from 4% earlier.
The unexpected bounty was cheered by the stock markets, with the BSE Sensex closing 0.92% up at 82,188.99, and the Nifty 50 surpassing the 25,000 level with a 252 pts upswing to close at 25,003.5. Bond markets, too, reacted positively, with the shorter end of the yield curve seeing some softening. The 10-year G-sec yield hit an intraday high of 6.290, before rising 4.3 bps to close at 6.289.
The repo rate is the rate at which banks borrow from RBI, and CRR refers to a certain percentage of cash that all banks have to keep with the RBI as a deposit.
The fine print
After Friday’s cut, the repo rate stands reduced to 5.5% from 6% earlier, and CRR to 3% from 4% earlier. The cut in CRR is expected to infuse liquidity worth ₹2.5 trillion in four tranches from 6 September to 29 November. The last time the CRR was cut by 100bps was during the covid-19 pandemic in 2020, when economic growth needed a major push.
“It is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum,” Malhotra said at the media briefing. “This changed growth-inflation dynamics calls for not only continuing with the policy easing but also frontloading the rate cuts to support growth. 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.”
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According to Malhotra, the announcement of CRR cut four months in advance is aimed at ensuring certainty to banks and markets regarding the health of the economy.
Five of the six MPC members voted for a 50 bps cut, with only Saugata Bhattacharya voting for a 25 bps rate cut. The six-member also changed the policy stance back to neutral from accommodative, citing limited space for further monetary easing.
After including Friday’s rate cut, MPC has cumulatively cut repo rates by a 100 bps since February this year, a development that economists widely expected would take the full year to roll out.
Most treasury heads and economists polled by Mint had predicted a 25 bps rate cut along with no change in policy stance. Only State Bank of India (SBImp) had predicted a 50 bps cut in interest rates.
GDP and inflation forecasts
While the MPC has maintained FY26 GDP growth forecast at 6.5%, it expects economic activity to maintain the momentum in the fiscal year, supported by private consumption and fixed capital formation. The committee however cautioned that spillovers emanating from protracted geopolitical tensions, and global trade and weather-related uncertainties could pose downside risks to growth.
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The MPC lowered its consumer price inflation (CPI) forecast by 30 basis points to 3.7% as the outlook remains benign. However, the committee expects FY27 inflation at 4.5%. High production of wheat and pulses in the rabi crop season along with early onset of monsoon, augurs well for the inflation outlook.
No more rate cuts?
Majority of economists, who were earlier expecting 50-100 basis points repo rate cut during the year, are now reading the policy action as an extended pause for the year.
HDFC Bank said in a research note on Friday that the RBI is likely to stay on pause on rate cuts at least in the next two policies (August and October). “Given the inflation trajectory, the RBI has space to cut the repo rate by another 25-50 bps in this cycle, but we see the probability of that happening to be low at this stage. For now, in our base case, we see the policy rate remaining unchanged at 5.5% for 2025.”
Nomura, however, expects terminal rates at 5%, with a likely pause in August, followed by 25 bps rate cuts each in October and December.
Faster transmission of rate cuts
With this cut in repo rate and CRR, the MPC expects policy transmission to be faster than before.
“The comfortable liquidity surplus in the banking system has further reinforced transmission of policy repo rate cuts to short term rates,” said Malhotra in his policy statement. “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.”
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Economists also expect that some of the liquidity infusion could be offset by the RBI reducing its forward book. As of April 2025, RBI’s forward book stood at $53 billion (up to one-year segment). Between February 2025 and April 2025, RBI reduced its dollar short position by $26, resulting in liquidity drain of $2.3 trillion.
“We believe that the liquidity infusion through the CRR cut would help cushion the rupee drain from the maturity of the RBI’s forward book over the coming months,” added HDFC bank in its note.
RBI, MPC, inflation, growth, interest rates, Nomura, Nifty, sensex, liquidity, Sanjay Malhotra, Bond markets, HDFC bank
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