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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

It is expected that the tax incentive offered in the budget for FY26 may support urban consumption demand, that has been lagging for the past couple of years, while the rural demand has shown some pick-up. Good monsoon may further stimulate rural demand. Benign inflation and below potential growth trajectory shall keep the RBI on the monetary easing path. Rates may fall further and liquidity may remain supportive. Continued focus on capacity building by the government may however continue to remain the mainstay of the growth.

The global environment remains challenging with trade related uncertainties and geopolitical tensions persisting. However, a resolution of trade and geopolitical conflicts could provide strong impetus.

In my view, 6% (+/- 50bps) may now be the base growth rate (or the new Hindu rate of growth, if you like) for the Indian economy. If India can manage to meet the basic needs (food, clothing, shelter, water, electricity, sanitation, basic education, and primary health) of its 1.4 billion population, our economy might keep growing at this rate for the next decade or so, at least. However, this base rate of growth may not be sufficient to lift the Indian economy to the middle income category like China, Brazil, South Korea, Malaysia, Indonesia, etc.

We urgently need catalysts that may provide the necessary escape velocity to catapult the India economy into a higher growth orbit. Unfortunately, the current growth paradigm lacks those catalysts.

To make my point clear, I would like to highlight the following three inadequacies of India's current growth paradigm.

Declining trend of global integration

The Indian economy has failed to maintain the pace of globalization. The share of India in global trade has remained marginal. In the past 11 years, our exports, as a percentage of GDP, have declined ~14% from 25.2% of GDP in FY14 to 21.6% of GDP in FY25. Similarly, imports have also declined from 27% of GDP in FY14 to 22.5% of GDP in FY25.

India’s exports have grown at a CAGR of 4.64% during FY15-FY25, while imports have grown at a CAGR of 4.36% during this period. The real GDP in this period has grown at a CAGR of 6.09%.

Even worse, the merchandise exports (mostly manufactured goods) have grown at a meager CAGR of 2.54% in the past 11 years. The share of merchandise export, as a percentage of GDP, has contracted 28.6% since FY14. Manufacturing GVA in FY25 was at all time low. Obviously, the government strategy of incentivizing manufacturing and boosting exports is not yielding good results, and may need a comprehensive overhaul.

Rate of investment remains low

The rate of investment in the Indian economy has shown some pick up in the post covid period, but it still remains much below the rate seen during 2004-2013 period. Gross Fixed Capital Formation (Investments) have grown at a CAGR of 6.41% (vs Real GDP CAGR of 6.09%) during FY15-FY25. Obviously, this rate of growth in investments is not adequate to gain escape velocity.

The corporate capex growth has also slowed down to just 8% in FY25, after two years of higher growth (27% in FY23 and 20% in FY24)

Consumption not growing

The share of private consumption in the GDP has remained stagnant around ~56 over the past 15 years (except during Covid years). In the past 11 years (FY15 to FY25) it has grown at a CAGR of 6.06%, less than the real GDP growth CAGR of 6.09%. Interestingly, in this period taxes on goods and services have increased at a CAGR of 6.41%.

Government consumption has also slowed down in this period from 10% of GDP in FY14 to 9.1% of GDP in FY25. Overall, government consumption has grown at a slower CAGR of 5.18% during FY15-FY25.

Notably, NSO second advance estimates of FY25 GDP has projected private consumption growth at 10% in 4QFY25 vs the actual 6%. For the full year private consumption growth of 7.2% was also marginally lower than the NSO forecast of 7.6%.

So, if none of the engines of growth – exports, consumption and investments – is showing signs of acceleration, achieving a higher target may not be possible; even though we may just draw comfort from the fact that base growth rate is now higher s compared to 1950-1990 period.

Next week – Growth statistics – the disconnect

Also read

The state of the Indian economy

The Indian economy – glass half full

Resilient growth despite disturbance and challenges

The full year FY25 growth (6.5% vs 9.2% in FY24) came in line with the second advance estimates of NSO; 4QFY25 growth rate (7.4% on a high base of 8.4% in 4QFY24) is much better than the estimates of the market professionals, though in line with NSO advance estimates.

The higher Q4 growth is mostly attributable to—

(i)    High gross investment (GCFC) led by the construction sector (4QFY25 10.8%), reflecting strong government capex.

Investment (Gross Fixed Capital Formation or GFCF) grew 9.4% yoy in 4QFY25, marginally above the long-term average. However, the higher public capex seen in 4QFY25 could be due to slow 1HFY25, as government functioning was impacted by the model code of conduct implemented during the general; elections.

(ii)   Farm sector growth of 5.4% in 4QFY25 (on a low base of 0.9% in 4QFY24). On a full year basis (FY25) also, the sector was up 4.6%, compared to 2.7% in FY24. If we consider the inclement weather for the most part of FY25, the growth is commendable.

The FY25 growth data is encouraging as it demonstrates the resilience of base growth level of the Indian economy in times of domestic disturbance (general election and inclement weather) and external challenges (slower global growth, volatile energy prices, geopolitical disruptions, etc.).

The government’s focus on austerity measures to optimize the cost of governance and capacity building (infrastructure – physical and social) is a major positive.

Long term growth trajectory recovers to pre-covid period

In FY26 the Indian economy is expected to regain the long-term growth trajectory of 6%+ after five years. For the past 11 yrs (FY15-FY25), the real GDP of India has grown at CAGR of 6.09%. This is slower than the preceding decade, nonetheless quite resilient in view of the global challenges.

Fiscal discipline maintained

One of the key positives of India's growth paradigm in the past one decade has been the commitment to fiscal discipline. Except for deviation during the pandemic period, the government has mostly maintained fiscal discipline.

For FY25RE, fiscal deficit was 4.8% of GDP (vs 5.6% in FY24; FY26BE 4.4%). Subsidies have been cut materially, despite political considerations - FY25 Union Budget subsidies at 1.2% of GDP were lowest in six years; FY26BE are even lower. 4QFY25 net indirect taxes (taxes on products & services minus subsidies) increased sharply by 12.7% yoy. This indicates even lower subsidy payout.

In FY25RE the government cut expenses by Rs 600 billion (vs FY25BE) to offset the Rs 700bn revenue shortfall. The government consumption in 4QFY25 was lower by 1.8% yoy.

FY26 has started on a good note, with April 2025 recording 61% yoy rise in government capex (low base due to general elections in 1QFY25) and ~6% contraction in revenue expenditure. Tax collections were 6.5% yoy higher in April 2025.

RBI has paid Rs2.7trn in dividend to the government in May 2025. This is Rs600bn higher than the budget estimates. This may take care of additional spending on defense etc.

Tomorrow: The Indian economy – glass half empty

Also read

The state of the Indian economy

Despite notable stability there are few areas of concern that investors should be mindful of. In particular, I shall be watching the development of external situations closely.

External situation - not worrying presently, but could deteriorate

India's external sector has shown resilience in recent years, but there are signs of strain. The merchandise trade deficit hit a near-record high of $26.42 billion in April 2025, driven by a 19.12% surge in imports outpacing a 9.03% export growth. This reflects a structural issue in India's trade balance, with heavy reliance on imported crude oil, gold, and electronics. While presently foreign exchange reserves are ~US$686 billion in January 2025, covering over 10 months of imports, the creeping depreciation of the rupee and global uncertainties (e.g., aggressive trade negotiation and geopolitics) add pressure.

The situation isn't critical yet, thanks to robust reserves and services exports, but the trend warrants caution as external vulnerabilities could escalate if global conditions worsen

Trade balance remains delicate

India's merchandise trade deficit for FY25 (April 2024–March 2025) has widened significantly, reaching $202.42 billion for the first eight months (April–November 2024), compared to $194.6 billion in the same period of FY24. This deterioration is driven by a faster rise in imports (8.3% growth to $486.73 billion) than exports (2.2% growth to $284.31 billion). November 2024 alone saw a record-high monthly deficit of $37.8 billion, fueled by a 27% surge in imports to $69.95 billion, largely due to a 4.3-fold jump in gold imports, alongside increases in electronics (17.4%), petroleum products (7.9%), and vegetable oil (87.8%). Exports, however, contracted by 4.8% to $32.1 billion in November, a 25-month low, partly due to declining petroleum prices.

The overall trade deficit (goods and services combined) is estimated at $94 billion for FY25, per posts on X, reflecting a structural imbalance. The trade deficit with China has surged to $99.2 billion, driven by an 11.5% rise in imports ($113.5 billion) and a 14.5% drop in exports ($14.25 billion). Conversely, India’s trade surplus with the US grew to $41.18 billion, with exports up 11.6% to $86.51 billion. The services trade surplus, estimated at $131.3 billion for April–December 2024, provides some relief, driven by strong IT and financial services exports. However, the current account deficit (CAD) is projected to widen to 1.4–2% of GDP in FY25, with Q3 FY25 potentially hitting 2.8% due to the November trade shock.

Trade deals with the UK, and potential trade deal with the US could impact trade balance negatively in the short term.

Despite intense efforts, India’s reliance on imported crude oil (88% of energy needs), gold, and electronics, alongside structural manufacturing gap, has not diminished materially. There have been some efforts to boost domestic manufacturing through monetary and fiscal incentives, but so far most of the investment has occurred in low value add businesses.

BoP Challenges

H1 FY25 (April–September 2024) BoP surplus was $23.8 billion, but 3QFY25 negative BoP of US$37.7bn on persistent FPI outflows and poor net FDI flows, raise some concerns over BoP for FY25; even though the projected current account surplus and potential stabilization in capital flows have shown promise in 4QFY25.

The BoP is expected to remain manageable, with a full-year CAD of 0.8–1.4% of GDP ($30–55 billion). A Q4 current account surplus could offset earlier deficits, but sustained FPI outflows and trade imbalances pose risks.

Global uncertainties (widening trade deficit, FDI slowdown, remittances slowdown due to the proposed remittance tax in the US, and domestic structural gaps pose strong headwinds for India’s BoP.

FDI slowing

Gross FDI Inflows in India were $81.04 billion in FY25, a 14% increase from $71.1 billion in FY24. FDI equity inflows rose by 45% to $29.8 billion (Rs. 2,58,873 crore) in H1 FY25 (April–September 2024), reversing three years of contraction.

However, net FDI inflows dropped to a record low of $0.353 billion in FY25, down 96.5% from $10 billion in FY24, due to large-scale repatriations and increased outward investments by Indian firms. Repatriations surged to $44.5 billion in FY24 and continued to be significant in FY25, driven by profitable exits through initial public offerings (IPOs) like Hyundai Motor and Swiggy, and divestments (e.g., Singtel’s Airtel stake, BAT’s ITC divestment). A key Swiggy investor reportedly earned over $2 billion post-IPO.

FDI slowdown could have some structural element as relative to GDP, net GDP has been declining for the past five years, and has fallen to the lowest level in more than two decades.

Net FPI equity flows negative since 2021

Net FPI equity flows (Primary market and secondary market) into India have been negative for the past four and half years (January 2021-YTD2025) now. A strong global liquidity event could perhaps reverse the trend, but so far there is little visibility of net FPI flows improving materially in the near term; notwithstanding the positive flows in the past three months.

Oil price and weaker USD offer some relief

Declining oil prices in early 2025 have eased pressure on India's import bill, given its heavy reliance on imported crude (85% of energy consumption). A weaker USD also reduces the cost of dollar-denominated imports and debt servicing. However, relying on these external factors is risky, as oil prices are volatile (e.g., influenced by OPEC decisions or geopolitical tensions), and the USD's trajectory depends on U.S. monetary policy. India needs to accelerate domestic energy production (e.g., renewables, green hydrogen) to reduce this vulnerability.

…but relying on externalities may not be a great idea

Dependence on favorable oil prices or a weaker USD is unsustainable, as these are beyond India's control. A stronger focus on structural reforms—such aggressive boost to manufacturing, enhancing export competitiveness, and reducing import dependency—would provide a more stable foundation. Additionally, diversifying trade partners and pursuing free trade agreements (e.g., with the EU, Japan) could mitigate risks from global volatility.

In conclusion, India's external situation is not yet alarming but shows clear signs of deterioration. The delicate trade balance, negative BoP, and volatile capital flows highlight structural weaknesses, particularly import dependency and sensitivity to global shocks. While forex reserves and services exports provide resilience, reliance on external factors like oil prices or USD weakness is risky. Fiscal slippages and food inflation add domestic pressures.

This session of the IPL has some valuable lessons for investors, in my view. In particular, I found the following most interesting.

·         Two out of the top four teams have never won the IPL trophy previously. Mumbai Indians, has won it five times (2013, 2015, 2017, 2019, 2020), while Gujarat Titans won it once (2022). Five-time winner Chennai Super Kings (CSK) finished the 2025 season at the bottom of the league table. Three-time winner Kolkata Knight Riders ended at 8^th place.

·         Several of the most successful players of the previous two seasons were either retained or bought at aggressive prices in 2025. Many of these players failed to perform in the current season. Some of the prominent underperformers were Rishabh Pant (Rs27cr), Kagiso Rabada (Rs10.75cr), Venkatesh Iyer (Rs23.75cr), Rashid Khan (Rs18cr), Dhruv Jurel (Rs14cr), Riyan Parag (Rs14cr), Rinku Singh (Rs13cr), Shivam Dube (Rs12cr), Ruturaj Gaikwad (Rs18cr), Mayank Yadav (Rs11cr), Ishan Kishan (Rs11.25cr), Nitish Reddy (Rs8cr) Tilak Varma (Rs8cr).

·         Some players who commanded a low premium at the 2025 auction performed much better than expectations. Some of the prominent outperformers were Karun Nair (Rs0.50 cr), Sai Kishore (Rs2cr), Digvesh Rathi (0.30cr), Ryan Rickelton (Rs1cr), and Ajinkya Rahane (1.5 cr).

·         The owner of Lucknow Super Giants (LSG), snubbed their 2024 captain K. L. Rahul, and opted for a very expensive Rishabh Pant. K. L. Rahul performed extremely well playing for Delhi Capitals, while Rishabh Pant was a massive failure both as a player and captain.

·         Rohit Sharma, M. S. Dhoni, Ravinder Jadeja, Rashid Khan etc. were some legends that failed to perform miserably.

Lessons for investors

(i)    The past performance of a stock/fund (player) or sector/fund house (team) is no guarantee for its continued performance in future. A strong performance in the recent past actually raises the chance of underperformance in the near future.

(ii)   Chasing momentum and paying high price for a stock (player) based only on its recent performance, without evaluating the sustainability and consistency of its good performance in future may cause disappointment and losses. Buying Mayank Yadav for Rs 11cr, without factoring in that his bowling action makes him injury prone, inconsistent and unsustainable player.

(iii)  Never sell a highly promising stock (player) just because it had few bad quarters. LSG owners must be regretting one such mistake, at least.

(iv)  After consistent performance over several years, fatigue sets in even in the best of the players and teams. Good players and teams either reinvigorate themselves or leave the ground for emerging starts. Stocks and sectors that are showing fatigue, but neither reinventing themselves nor leaving the space (M&A), need to be jettisoned from portfolios without much delay. Love your families and friends not stocks.

(v)   It’s a good idea to keep watch on the past favorites, who had fallen out of favor for underperformance. If they begin to show promise again, do not hesitate to invest in them, just because you had a bad experience with them in the past.

(vi)  Paints, Private Banks, Consumer Staples, large IT Services are some examples of the strong past performers experiencing growth fatigue. Watch such stocks/stocks carefully for signs of failing or reinvigoration. Either way, they might provide an actionable idea.

(vii) Keep a close watch on the emerging stocks/sectors, but do not rush to buy (at obscenely priced IPOs, for example). Some of them could become legends, but many of them may fail to deliver on their promises.

(viii)    Last but not the least, there could be top players (stocks) in an underperforming team (sector). Do not lose sight of such stocks (players).