India front-loads rate cuts to support economic growth, slashes reserve ratio
MUMBAI: The Reserve Bank of India (RBI) cut its key repo rate by a larger-than-expected 50 basis points on Friday and slashed the reserve ratio for banks as low inflation gave policymakers room to focus on supporting growth amid a volatile global economy.
The central bank, however, changed its monetary policy stance from 'accommodative' to 'neutral', stating that it may have limited space for further easing.
The Monetary Policy Committee (MPC), which consists of three RBI officials and three external members, cut the repo rate to 5.50 per cent. It has now cut rates by 100 basis points across three consecutive meetings in 2025, starting with a quarter-point reduction in February, its first cut since May 2020. It made a similar-sized cut in April.
Five of the six committee members voted in favour of the decision.
The RBI also cut the cash reserve ratio by 100 basis points to 3 per cent, adding to already surplus liquidity. The cut will take effect in four stages between September and December.
"The change in the growth-inflation dynamics calls for not only continuing with policy easing but also the MPC felt front-loading the rate cuts to support growth," said RBI governor Sanjay Malhotra.
"After having cut the policy rate by 100 basis points in quick succession since February 2025, the monetary policy committee also felt that under the present circumstances, monetary policy is now left with very limited space to support growth," he said.
India's GDP growth surged to 7.4 per cent in the January-March quarter and the central bank projects the economy will expand at 6.5 per cent this financial year.
"Today's monetary policy actions should be seen as a step towards propelling growth to a higher aspirational trajectory," Malhotra said.
Markets swung sharply on the unexpectedly large cut in rates and the signal that the monetary easing cycle may be over.
India's benchmark 10-year bond yield was little changed at 6.19 per cent, after dropping 10 basis points earlier, while the rupee was little changed at 85.85, after dropping as much as 0.2 per cent. The benchmark equity indexes were up around 0.7 per cent each in a volatile trading session, and bank stocks surged.
The central bank has chosen to front-load the "growth adrenalin," said Shubhada Rao, head of Mumbai-based economics advisory firm QuantEco Research. "Going forward we do not expect rate cuts over the next two policy reviews in August and October."
Benign inflation
The central bank cut its inflation projection for the current financial year and now expects it to average 3.7 per cent compared to 4 per cent previously.
Retail inflation has slowed more quickly than expected in recent months and dropped to a near six-year low of 3.16 per cent in April, sharply below the RBI's medium-term target of 4 per cent.
The outlook for inflation points towards benign prices across major constituents, the MPC said in its statement.
Inflation is expected to align with the central bank's target and is also "likely to undershoot the target at the margin", the statement said.
Sridhar Sivaram, investment director at portfolio management firm Enam Holdings who had expected a 50 bps cut, says inflation may fall as low as 3 per cent, leaving space for another 25-50 basis points in rate cuts in this cycle.
Focus on transmission
With a steeper than expected cut in policy rates and ample liquidity, the central bank is prodding banks to lend more and at lower rates.
"The ball is in the banks' court to transmit easier financial conditions faster," said Madhavi Arora, chief economist at Emkay Financial Services.
Bank loan growth dipped to 9.8 per cent in May 2025, reflecting a broad-based decline in lending in the economy, a report from the economic research division of State Bank of India said ahead of the policy review, calling for a 50 bps rate cut.
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