RBI takes up slasher in hand for frontloading rate cuts to push 3D India

Time of India

2 days ago

The Reserve Bank of India (RBI) cut its key repo rate by a larger-than-expected 50 basis points on Friday, a third consecutive reduction, and slashed the reserve ratio for banks as muted inflation provided space for policymakers to focus on supporting economic growth.
The
Monetary Policy Committee
(MPC) cut the repo rate to 5.50%. It has now cut rates by 100 basis points in 2025, starting with a quarter-point reduction in February, its first cut since May 2020. The RBI also cut the cash reserve ratio by 100 basis points to 3%, adding to already surplus liquidity.
The central bank at the same time changed its monetary policy stance to 'neutral' from accommodative, with the governor saying further action will depend on incoming data.
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Now, under the current circumstances, monetary policy is left with "very limited space" to support growth, said Governor
Sanjay Malhotra
while announcing the MPC decision.
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With a jumbo repo rate cut and a boost to banking liquidity via CRR cut plan the RBI has done the heavy-lifting, weeks after announcing record dividend payout of Rs 2.68 lakh crore to New Delhi, which may now need to ramp up fiscal measures to shore up economic growth for Asia's third-largest economy.
The double-barreled monetary bazooka also sent the Sensex soaring over 800 points and catapulted the Nifty Bank to a fresh record high of 56,644.
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'Frontloading' of growth plan
The inflation outlook for the year has been revised downwards from the earlier forecast of 4.0 per cent to 3.7 per cent. GDP forecast for FY2025-26 was retained at 6.5% by the central bank.
Growth, "remains lower than our aspirations" amidst challenging global environment and heightened uncertainty, said the Governor.
The changed growth-inflation dynamics calls for not only continuing with the policy easing but also "frontloading the rate cuts to support growth," Malhotra said. Accordingly, the MPC voted to reduce the policy repo rate by 50 basis points to 5.50 per cent, he added.
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"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."
The near-term and medium-term outlook now gives RBI the confidence of not only a durable alignment of headline inflation with the target of 4 per cent, as exuded in the last meeting but also the belief that during the year, it is likely to undershoot the target at the margin, Malhotra said.
The MPC surprised markets by frontloading policy easing measures, with the strong liquidity impetus in the run-up already adding a de facto rate reduction, in addition to the 50bp cut in the benchmark rate, opined Radhika Rao, Executive Director and Senior Economist at DBS Bank.
The policy committee provided a "double-barrelled boost" by undertaking a 50bp rate cut as well as a durable liquidity infusion via the CRR cut, tapping into the window of below-target inflation this quarter, she added.
RBI's formula for 3D India
Governor Malhotra gave a 5x3x3 formula for the 3D
Indian economy
that presents a picture of 'strength, stability, and opportunity.' The governor said:
First, strength comes from the strong balance sheets of the five major sectors - corporates, banks, households, government, and the external sector.
Second, there is stability on all three fronts – price, financial, and political – providing policy and economic certainty in this dynamically evolving global economic order.
Third, the Indian economy offers immense opportunities to investors through 3Ds – demography, digitalisation and domestic demand.
This 5x3x3 matrix of fundamentals provides the necessary core strength to cushion the Indian economy against global spillovers and propel it to grow at a faster pace, Malhotra added.
India's Growth inflation dynamics
India's GDP rose to a four-quarter high of 7.4% in the three months to March from a year earlier, as per data released by the government last week. For the fiscal year ended March, the economy expanded 6.5%.
During 2025-26 so far, domestic economic activity has exhibited resilience and agriculture sector remains strong, RBI governor noted.
Moreover, Industrial activity is "gaining gradually, even though the pace of recovery is uneven." Services sector is expected to maintain momentum, the central bank said
"On the demand side, private consumption, the mainstay of aggregate demand, remains healthy, with a gradual rise in discretionary spending. Rural demand remains steady, while urban demand is improving. Investment activity is reviving as reflected by high-frequency indicators."
Meanwhile, the outlook for inflation points towards "benign prices" across major constituents. The record wheat production and higher production of key pulses in the Rabi crop season should ensure adequate supply of key food items, the Governor said.
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."
Although, RBI has warned that the country needs to remain watchful of weather-related uncertainties and still evolving tariff related concerns with their attendant impact on global commodity prices.