RBI Repo Rate: RBI Delivers Monsoon ‘Dhamaka’ With 50 Bps Rate Cut At MPC Meeting

The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) reviewed the economic backdrop while deciding on the interest rate on June 6, 2025. Inflation was soft, at 3.16 per cent in April 2025. The RBI’s policy stance was accommodative, which was changed from neutral in the previous policy review on April 9, 2025. The market expected continuation of rate reduction, which was done in the previous two meetings in February and April 2025, by 25 basis points (bps) each time. 

Booster Measures Today

Repo rate is defined as the rate at which RBI lends to banks. However, it has a wider connotation. It is the pivot for interest rates across the system. When inflation is low, and RBI wants interest rates in the country to ease, they increase the repo rate, and vice versa. Interest rates in the country follow suit. On June 6, 2025, the RBI cut the repo rate by 50 bps, from 6 percent to 5.50 percent. This was higher than the majority market expectation of 25 bps, which may be called a ‘dhamaka’.

The other big measure was reduction in cash reserve ratio (CRR) by 100 bps. CRR is what banks have to park with RBI in the form of cash, and there is no interest paid by RBI on this money. Reduction of CRR from 4 per cent to 3 per cent would release approximately Rs 2.5 lakh crore (Rs 2.5 trillion) in tranches over a period of time till December 2025.

However, after the dhamaka measures, there is a word on moderation as well. There is a policy stance, which communicates the approach to interest rate decisions. In the previous policy review in April 2025, the stance was changed from neutral to accommodative, which communicates a priority for reducing interest rates. Today, the stance was changed from accommodative to neutral. The policy document also states that “monetary policy is left with very limited space to support growth”. The implication is, future rate cut(s) might become uncertain. Going forward, the RBI would reduce policy rates only if the situation is conducive. In other words, if inflation remains within target.

Economic Variables

The most important variable for RBI’s decision on interest rate is inflation. The outlook for consumer price index (CPI) inflation in 2025-26, which was 4 per cent in the previous review in April 2025, has been improved to 3.70 per cent in today’s review. To a large extent, this explains the heavy dose of rate cut announced today. The target on inflation is 4 per cent with a leeway of 2 per cent on either side. With Inflation being expected to remain within the central target of 4 per cent, this gives the MPC space to deliver rate cuts.

The gross domestic product (GDP) growth in 2024-25 was 6.50 per cent, and the projected growth rate for 2025-26 is 6.50 per cent as well. While this is not a bad growth rate, there is potential for more, as India is a growing economy. Hence, this also presented a case for reducing the interest rates.  

The Union Budget presented on February 1, 2025 shows that the government is clearly on the path of fiscal consolidation. Fiscal deficit for 2024-25 was maintained at 4.8 per cent of the GDP. This year, 2025-26, the fiscal deficit is estimated at 4.40 per cent of the GDP. Reduction of fiscal deficit is positive for inflation.

Impact

Since February 2025, the RBI’s MPC has delivered a 100 bps rate cut. It is being transmitted to the ground, in the form of bank deposit and lending rates. Floating rate loans from banks are benchmarked to either the RBI repo rate or the Treasury Bill yield. Borrowers of floating rate loans will get the benefit immediately in their equated monthly instalments (EMIs). The banking system already has surplus liquidity and the reduction of CRR will put more money in the hands of banks. This will aid the process of transmission of the 100 bps rate cut.

Analysis

The watchword in today’s policy review is frontloading. As RBI Governor Sanjay Malhotra said in his media interaction after the announcement of the cut in repo rate, the MPC had the option to either cut repo rate by 25 bps and continue with an accommodative policy stance, or cut by 50 bps and change policy stance to neutral. He said they had chosen the second option, as well as cut CRR by significant 100 bps. By virtue of frontloading, the desired impact on GDP growth will happen relatively faster. The other side of the coin is though this may not be the last policy rate cut in the current cycle, future rate cuts will become contingent on data and a matter of ifs and buts. 

Conclusion

The next review meeting of the RBI MPC is scheduled for August 5-7, 2025. It is likely that they would maintain the interest rates at the current level and maintain a ‘wait and watch’ stance. For the equity market, today’s review is positive as it promotes growth. For the bond market, while it is positive, taking a call on long-duration funds, on the expectation of further rate cuts and yield levels coming down, becomes tricky.

The writer is a corporate trainer (financial markets) and author

 (Disclaimer: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)