Do it yourself

Policy rates cut by 50bps to support growth

The Monetary Policy Committee (MPC) reduced the policy repo rate by 50 bps to 5.50%, a larger-than-expected cut compared to market expectations of a 25bps reduction. This was the third consecutive rate cut in 2025, following reductions in February (6.5% to 6.25%) and April (6.25% to 6.00%). Consequently, the Standing Deposit Facility (SDF) rate was adjusted to 5.25%, and the Marginal Standing Facility (MSF) rate and Bank Rate to 5.75%.

This sharp cut in rates is aimed at accelerating the growth. Pertinent to note that FY25 real GDP grew by 6.5% yoy, and is expected to grow at a similar or lower rate in FY26. Considering the fragile global conditions, it is imperative to support the domestic economy maintaining a healthy growth momentum.

The rate cuts are expected to stimulate credit demand, private consumption and capex demand. At least four public sector banks (BoB, PNB, BOI, UCO) have reportedly cut their repo linked lending rates by a matching 50bps.

Cash Reserve Ratio (CRR) requirement reduced by 100bps

The RBI decided to lower the CRR for scheduled commercial banks by 100 bps to 3.0% of Net Demand and Time Liabilities (NDTL). This cut will be implemented in four tranches of 25bps each, starting September 6, 2025, through November 29, 2025. This aims to enhance liquidity in the banking system.

This 100bps cut in the CRR would potentially release an additional Rs2.5 trillion liquidity in the banking system in the busy season. Notably, the RBI has taken several steps in the past few months to augment the banking system liquidity. Since January 2025, the RBI has infused Rs9.5 trillion in additional liquidity in the system; resulting in a system liquidity surplus of over Rs 1.5 trillion.

 

Policy stance changed to ‘neutral’ from ‘accommodative’

The MPC shifted its stance from “accommodative” to “neutral,” signaling a cautious approach to further rate cuts and a potential pause in the rate-cutting cycle.

FY 26 growth forecast maintained at 6.5%, despite substantial monetary easing

The RBI maintained its real GDP growth forecast for FY26 at 6.5% yoy, the same as FY25. This highlights the challenges faced by the Indian economy presently, both from the global disturbances and domestic conditions.

The RBI sees CPI Inflation at 3.7% for FY26, down from previous forecast of 4% and below its tolerance band of 4 to 6%. This clearly reflects RBI’s optimism about price stability.

Despite substantial monetary easing, a favorable monsoon, stable fiscal balance, and strong government capital expenditure, the domestic growth is not expected to accelerate from the current pace.

The question thus arises, whether this boldness of the RBI is emanating from the confidence in the resilience of the economy and its commitment to stimulate economic growth; or it is a move to preempt a slide in the economic growth due to the anticipated global trade and geopolitics related developments.

I do not have any ready answer for this inquisition. However, I shall be closely monitoring some of the pointers from Governor Malhotra’s statement. For example:

1.    In his opening remark, the Governor highlighted the global challenges – “complex interconnections within the financial system, elevated debt levels and growing influence of frontier technologies are raising financial stability concerns. Amidst heightened volatility in capital flows and exchange rates, coupled with constrained policy space, central banks of emerging market economies have a tougher task to stabilize their economies against global spillovers”.

Though, the governor confidently stated, “In this global milieu, the Indian economy presents a picture of strength, stability, and opportunity”; the global spillovers need to be watched carefully.

2.    The governor exuded confidence that the actual inflation may undershoot the RBI target, and this is one of the core reasons for the bold policy move. He stated, “While food inflation outlook remains soft, core inflation is expected to remain benign with easing of international commodity prices in line with the anticipated global growth slowdown (emphasis supplied). The inflation outlook for the year is being revised downwards from the earlier forecast of 4.0 per cent to 3.7 per cent.

A quicker resolution of trade disputes and geopolitical conflicts might change this outlook, as the global growth might accelerate and commodity prices may rise. Also, an excessive monsoon may cause vegetable prices to rise faster than anticipated.

3.    The governor emphasized that “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. 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.”

Though many analysts are expecting more rate cuts later this year, the governor appears to be suggesting otherwise.

4.    The governor pointed out that “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”.

We have witnessed that the banks have been reluctant to transmit the previous rate cuts to the borrowers. In the present case also, while the repo linked rates are getting adjusted, the action in case of MCLR based loans is limited. HDFC Bank for example has cut only by 10bps post the policy statement.

A failure to ensure full transmission may defeat the objective of RBI’s aggressive easing.

5.    The governor warned that “The stress witnessed earlier in retail segments like unsecured personal loans and credit card receivables portfolio has abated, while the stress in micro-finance segment is persisting”.

The stress in MFI is typical of elevated stress in the unorganized segment of the economy, especially rural and semi urban areas. This stress also has some relevance for private consumption.

6.    The governor also sought to end the growth vs inflation debate, stating that “there is no tussle between price stability and growth in the medium and long term. Price stability preserves purchasing power, imparts certainty to households and businesses in their savings and investment decisions and ensures congenial interest rate and financial conditions, all of which foster consumption, investment and overall activity. Moreover, it is crucial for equitable growth and shared prosperity because its absence is disproportionately burdensome on the poor”.

This is a new policy paradigm for the RBI, more aligned to the political narrative than the central banking. We will have to monitor how consistently the RBI follows this new tenet of monetary policy.

Conclusion

The 50bps rate cut demonstrates the RBI’s commitment to growth amid global headwinds. The CRR reduction is a significant liquidity booster for banks. This will augment credit availability for MSMEs and retail borrowers. The downward revision of the FY26 inflation forecast to 3.7% reflects confidence in price stability. Emphasis on recalibrating business models in high-risk segments (e.g., microfinance) and strengthening credit underwriting practices indicates proactive risk management.

The shift to a neutral stance suggests the RBI believes monetary policy has limited room to support growth further, as noted in the policy statement. This could constrain future responses if economic conditions deteriorate.

Further, the RBI has limited control over supply-side inflation, driven by commodity prices and fiscal policy. If supply constraints re-emerge, the RBI’s ability to maintain inflation within the 4% target could be tested, potentially forcing a policy reversal.

Besides, rapid rate cuts and liquidity injections could lead to overheating in certain sectors, such as real estate or consumer credit, if not monitored closely.

Deposit rates that have already been declining may decline further, impacting the savers, especially the pensioners, adversely. However, the pace of transmission of rate cuts lender is still not congruent with the policy objectives.

Also read

The state of the Indian economy

The Indian economy – glass half full

The Indian economy – glass half empty