As expected, the Reserve Bank of India (RBI), in its third monetary policy committee (MPC) meeting for 2025, decided to cut the repo rate, the central bank's rate for short-term loans to banks, by 50bps (basis points) to 5.5% from 6%, at the lowest level in nearly three years. Consequently, the standing deposit facility (SDF) rate is lowered to 5.25%, and the marginal standing facility (MSF) rate and the bank rate are reduced to 5.75%.
RBI also decided to reduce the cash reserve ratio (CRR) by 100bps to 3% from 4% of net demand and time liability. "This will be done in a staggered manner through the course of the year in four equal tranches of 25bps each," RBI governor Sanjay Malhotra says.
RBI maintained its real gross domestic product (GDP) growth forecast for FY25-26 to 6.5%, down from 6.7%. Inflation is projected at 3.7% from 4%, with RBI expressing confidence in achieving the 4% inflation target within a 12-month horizon.
The RBI governor, who chaired the MPC meeting, announced the decision of the six-member panel. "After having reduced the policy repo rate by 100bps 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. 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."
While food inflation outlook remains soft, RBI says core inflation is expected to remain benign with the easing of international commodity prices in line with the anticipated global growth slowdown. "The inflation outlook for the year is being revised downwards from the earlier forecast of 4% to 3.7%. Growth, on the other hand, remains lower than our aspirations amidst a challenging global environment and heightened uncertainty."
Thus, Mr Malhotra says it is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum. "This changed growth-inflation dynamics calls for not only continuing with the policy easing but also frontloading the rate cuts to support growth," he added.
The MPC, accordingly, voted to reduce the policy repo rate by 50bps to 5.50%. Dr Nagesh Kumar, professor Ram Singh, Dr Rajiv Ranjan, Dr Poonam Gupta and the RBI governor voted to decrease the policy repo rate by 50bps. Saugata Bhattacharya voted for a 25bps cut in repo rate.
Announcing the policy decision, the RBI governor says the uncertainty around the global economic outlook has ebbed somewhat since the MPC met in April in the wake of a temporary tariff reprieve and optimism around trade negotiations. "However, it continues to remain elevated to weaken sentiments and lower global growth prospects. Accordingly, global growth and trade projections have been revised downwards by multilateral agencies. Market volatility has eased in the recent period with equity markets staging a recovery, dollar index and crude oil softening, though gold prices remain high."
According to the provisional estimates released by the National Statistical Office (NSO) of 30 May 2025, real GDP growth in the fourth quarter (Q4) of FY24-25 stood at 7.4% as against 6.4% in Q3. On the supply side, real gross value added (GVA) rose by 6.8% in Q4 of FY24-25. For FY24-25, real GDP growth was placed at 6.5%, while real GVA recorded a growth of 6.4%, RBI says.
Going forward, Mr Malhotra says, economic activity continues to maintain the momentum in FY25-26, supported by private consumption and traction in fixed capital formation. "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."
"Investment activity is expected to improve in light of higher capacity utilisation, improving balance sheets of financial and non-financial corporates, and the government’s capital expenditure push. Trade policy uncertainty continues to weigh on merchandise exports prospects, while the conclusion of free trade agreement (FTA) with the UK and progress with other countries is supportive of trade activity," he added.
On the supply side, RBI says agriculture prospects remain bright on the back of an above normal south-west monsoon forecast and resilient allied activities. Services sector is expected to maintain its momentum. However, it says spillovers emanating from protracted geopolitical tensions, and global trade and weather-related uncertainties pose downside risks to growth. Taking all these factors into account, real GDP growth for FY25-26 is projected at 6.5%, with Q1 at 6.5%, Q2 at 6.7%, Q3 at 6.6%, and Q4 at 6.3%.
According to RBI, consumer price index (CPI) headline inflation continued its declining trajectory in March and April, with headline CPI inflation moderating to a nearly six-year low of 3.2% in April 2025. "This was led mainly by food inflation, which recorded the sixth consecutive monthly decline. Fuel group witnessed a reversal of deflationary conditions and recorded positive inflation prints during March and April, partly reflecting the hike in liquified petroleum gas (LPG) prices. Core inflation remained largely steady and contained during March-April, despite an increase in gold prices exerting upward pressure."
The outlook for inflation points towards benign prices across major constituents, the central bank says, adding that the record wheat production and higher production of key pulses in the Rabi crop season should ensure an adequate supply of key food items.
"Going forward, the likely above normal monsoon along with its early onset augurs well for Kharif crop prospects. Reflecting this, inflation expectations are showing a moderating trend, more so for the rural households. Most projections point towards continued moderation in the prices of key commodities, including crude oil. Notwithstanding these favourable prognoses, we need to remain watchful of weather-related uncertainties and still evolving tariff-related concerns with their attendant impact on global commodity prices," Mr Malhotra, the RBI governor, says.
According to Anuj Puri, chairman of ANAROCK group this is the third consecutive time this year that RBI has cut the repo rates. "This effectively lowers the cost of borrowing, making home loan EMIs easier on the pocket and thereby directly improving affordability for buyers. This can potentially boost demand in the Indian real estate sector, especially in affordable and mid-income segments. Affordable housing faced the sharpest pandemic fallout, with sales and new launches shrinking in the top seven cities."
"While the rate cut is a strong positive for real estate, especially for affordable housing, much now depends on how well it can adapt to higher input costs and ongoing global uncertainties. Continued policy support and a shift to domestic sourcing could be critical for sustained growth," he added.
