The Reserve Bank of India (RBI) made a surprise move on Friday, cutting its key repo rate by 50 basis points to 5.50%, marking the third consecutive rate reduction in 2025. The central bank also lowered the cash reserve ratio (CRR) by 100 basis points to 3%, a measure to add liquidity to the economy. This decision comes amidst growing global economic uncertainty fueled by tensions, including U.S. President Donald Trump’s trade tariffs, and concerns over a potential U.S. economic slowdown.
RBI’s Shift to Neutral Stance
With inflation showing signs of easing, the RBI shifted its monetary policy stance from ‘accommodative’ to ‘neutral,’ signaling that further rate cuts may be limited. The central bank emphasized that the priority now is to support growth, particularly after the strong GDP growth of 7.4% in the January-March quarter. India’s GDP is expected to expand at 6.5% this financial year, with the RBI hoping for a long-term growth trajectory between 7% and 8%. RBI Governor Sanjay Malhotra mentioned that the decision to front-load the rate cuts was to give a “growth adrenaline” boost to the economy.
Inflation and Economic Outlook
The RBI also revised its inflation projection for the current financial year, now expecting it to average 3.7%, down from a previous estimate of 4%. Retail inflation dropped to 3.16% in April, the lowest in nearly six years, signaling a benign inflationary environment. The central bank anticipates inflation will align with its 4% target and might even undershoot slightly. Investment director Sridhar Sivaram forecasts inflation could fall to as low as 3%, leaving room for additional rate cuts in this cycle.
Impact on Bank Lending and Market Reactions
The RBI’s policy adjustments aim to spur lending by banks, as loan growth dipped to 9.8% in May 2025. While the rate cut provides ample liquidity, the central bank is pushing banks to transmit these conditions faster. Despite market volatility, including a slight depreciation of the rupee, the equity market responded positively, with bank stocks surging. The RBI’s move was seen as a necessary action to foster economic growth and stimulate lending.
