 "RBI Governor Sanjay Malhotra")
The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Friday cut the repo rate by 50 basis points (bps) to 5.5 per cent, surprising markets, which had largely priced in a more modest reduction of 25 bps. Frontloading of the repo rate cut is aimed at faster transmission of policy rate to lending and deposit rates.
This decision was welcomed by the bond market, but the exuberance was short-lived, as the RBI simultaneously shifted its policy stance from accommodative to neutral, citing limited room for further monetary accommodation.
Simultaneously, it announced a staggered 100-bp reduction in the cash reserve ratio (CRR), bringing it down to 3 per cent of banks’ net demand and time liabilities — a level not seen in normal times.
The rate cut underscored the central bank’s commitment to supporting economic growth. RBI Governor Sanjay Malhotra said growth remained below aspirational levels amid a challenging global environment and heightened uncertainty.
“It is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum,” said Malhotra while announcing the monetary policy outcome. “This changed growth-inflation dynamic calls for not only continuing with the policy easing but also frontloading the rate cuts to support growth.”
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He noted that while monetary transmission had been faster this time than on previous occasions, more rapid action was still needed. Banks need to do it faster, and that is why the rate cuts have been frontloaded, explained the RBI governor.
The decision to cut the repo rate by 50 bps was backed by a 5:1 vote, with external member Saugata Bhattacharya favouring a 25-bp reduction.
There was no vote required on the change in policy stance, which Malhotra said was unanimously agreed. The stance had been shifted from neutral to accommodative only in April, making Friday’s decision one of the quickest reversals in recent memory.
“This thought had crossed our minds too — that we had changed the stance in the last policy itself,” Malhotra said in response to questions. “We had the option to retain the accommodative stance and do nothing, but the action is what truly matters.”
“We could have continued with an accommodative stance or offered more certainty; we believe the latter was the right course. We had promised to lower rates and we delivered,” he said.
“We’ve now shifted the stance to neutral because we wanted to send this message: Given the current circumstances, there is very limited space to cut rates further,” Malhotra said.
A Nomura note described the “flip back to ‘neutral’ so soon” as “a sign of more nimble decision-making”.
The stance change implies another rate cut would be unlikely in the next MPC meeting in August. “With the change in stance, the RBI has signalled the end of the easing cycle, in our view,” Goldman Sachs said in a note.
Malhotra emphasised that future policy direction would depend on incoming data. “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,” he said.
The stance shift to neutral may indicate a pause in rate action for the foreseeable future, said Sakshi Gupta, principal economist at HDFC Bank.
State Bank of India Chairman C S Setty described the policy as “innovative, out-of-the-box and an unanticipated surprise”, calling it an “action-packed” announcement. “The MPC has broadly addressed any concerns on slowdown in growth on account of global uncertainties and fully capitalised on the softening domestic inflation to deliver a frontloaded rate cut, staggered durable liquidity injection, yet conserving the space for future action,” he said.
The frontloaded rate cut is expected to push banks to reduce lending rates, particularly for retail products like home and auto loans, which are linked to the repo rate. These loans are likely to see an immediate and equivalent reduction in rates. However, this may exert pressure on banks’ net interest margins.
The CRR cut is expected to offset some of that pressure. The release of ₹2.5 trillion in liquidity by December will allow banks to deploy funds into interest-earning assets. The RBI estimates a 7-bp improvement in banks’ margins from the CRR cut.
The RBI revised its inflation forecast for the current financial year to 3.7 per cent, down from 4 per cent projected earlier. “The near-term and medium-term outlook now gives us the confidence of not only a durable alignment of headline inflation with the target of 4 per cent, as exuded in the last meeting, but also the belief that during the year, it is likely to undershoot the target at the margin,” Malhotra said.
The central bank retained its GDP growth forecast for FY26 at 6.5 per cent. “I must also add that while price stability is a necessary condition, it is not sufficient to ensure growth,” Malhotra said.
Economists cautioned that it would remain to be seen whether the large liquidity infusion could be effectively absorbed by the real economy. If not, there could be a risk of asset price inflation.
