RBI slashes repo rate by 0.5% to boost growth

In this screenshot from @reservebankofindia593 via Youtube, RBI Governor Sanjay Malhotra gestures while delivering the Monetary Policy statement, in Mumbai, on June 6, 2025. Photo: @RBI via PTI Photo)

In a bid to spur growth at a time when inflation has come under control, the Reserve Bank of India’s Monetary Policy Committee on Friday (June 6, 2025) voted 5:1 to slash the policy repo rate by a bigger-than-expected 50 basis points to 5.50% with immediate effect. This is the RBI’s third repo rate cut since February and will further reduce the interest burden for borrowers but will also cut the interest earned on savings by depositors.

Also Read: A tough call: On the RBI MPC’s first policy review of 2025

Separately, the RBI also decided to reduce the cash reserve ratio (CRR) by 100 basis points (bps) over the course of this year in an effort to provide sufficient and durable liquidity to the banking system. This means that the percentage of deposits that banks must keep in reserve with the central bank has been cut, leaving more money available for lending.

“The cut in CRR would release primary liquidity of about ₹2.5 lakh crore to the banking system by December 2025. Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market,” RBI Governor Sanjay Malhotra said in his statement.

Dr. Nagesh Kumar, Prof. Ram Singh, Dr. Rajiv Ranjan, Dr. Poonam Gupta and Sanjay Malhotra, voted to decrease the policy repo rate by 50 bps. Saugata Bhattacharya voted for a 25 bps cut in repo rate.

Staggered CRR cut

The CRR will be reduced to 3% of net demand and time liabilities (NDTL) in a staggered manner, with four cuts of 25 bps each taking effect from the fortnights beginning September 6, October 4, November 1, and November 29. One basis point is equal to 0.01%.

Also read: RBI repo cut: Industry reactions

“This decision is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” the RBI said in the monetary policy statement.

The MPC believed that, despite global uncertainties, Indian economic activity will continue to maintain momentum in the financial year 2025-26, supported by private consumption and traction in fixed capital formation.

Maintaining GDP growth forecast

Taking various factors into account, real GDP growth for 2025-26 has been maintained and projected at 6.5%, with first quarter (Q1) growth of 6.5%, Q2 at 6.7%, Q3 at 6.6%, and Q4 at 6.3%.

“The sustained rural economic activity bodes well for rural demand, while continued expansion in services sector is expected to support the revival in urban demand,” the RBI said. “Investment activity is expected to improve in light of higher capacity utilisation, improving balance sheets of financial and non-financial corporates, and government’s capital expenditure push,” it added.

On the supply side, agriculture prospects remain bright on the back of an above-normal southwest monsoon forecast and resilient allied activities, it pointed out.

Predicting lower inflation

With inflation under control within the tolerance band, and assuming a normal monsoon, CPI inflation for 2025-26 has been revised downwards from the earlier 4%, and is now projected at 3.7%, with Q1 at 2.9%; Q2 at 3.4%; Q3 at 3.9%; and Q4 at 4.4%.

The MPC also decided to change its policy stance from accommodative to neutral, leaving it free to raise repo rates if inflation trends change. “After having reduced the policy repo rate by 100 bps in quick succession since February 2025, under the current circumstances, monetary policy is left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral,” the Governor said.

‘Fast-changing situation’

“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. The fast-changing global economic situation too necessitates continuous monitoring and assessment of the evolving macroeconomic outlook,” the RBI said.

Mr. Malhotra said the stress witnessed earlier in the retail segments, such as unsecured personal loans and credit card receivables, has abated, while the stress in the micro-finance segment is persisting. “Banks and NBFCs active in these segments are already recalibrating their business models, strengthening their credit underwriting practices and stepping up their collection efforts to avoid any excessive build-up of risks on this front in future,” he said.

“At the Reserve Bank, therefore, while price stability remains the focus of monetary policy, we are not oblivious to putting in place complementary monetary and credit policies and regulations that support growth and prosperity,” he highlighted.