Further repo rate cut is imminent on June 8, 2025

Time of India

2 days ago

Dr Rao is currently teaching risk management in the institute of Insurance and Risk Management (IIRM). A career banker with Bank of Baroda, he held the position of General Manager - Strategic Planning, Later was Associate Professor with National Institute of Bank Management (NIBM) and was Director, National Institute of Banking Studies and Corporate Management (NIBSCOM). He writes for financial dailies on Banking and Finance and his work can be viewed in the public domain.His academic accomplishments include Ph.d in commerce from Banaras Hindu University (BHU), MBA ( Finance), LLB. He runs a Youtube channel - Bank on Me - Knowledge series He likes to share his perspectives with next generation potential leaders of the banking industry. His book on "Transformation of Public Sector Banks in India' was published in september 2019. His most interesting work is in Ideasforindia.com blog. LESS ... MORE
In the backdrop of the economy's multidimensional resilience growing at 6.5 percent in FY25, in line with RBI expectations, and inflation expected to stay below the 4 percent mark, there is general buoyancy in markets. This is despite tense geopolitical risks, ongoing border unrest, and the US changing the tariff gears, arbitrarily increasing uncertainty.
GDP growth is supported by corresponding GVA growth during FY25 at 6.4 percent, though it dropped from 8.6 percent in FY24 in sync with the then-GDP. Among the important drivers of monetary policy, the inflation and growth trajectories are key factors influencing the policy actions.
The annual inflation rate fell to 3.16 percent in April 2025, down from 3.34 percent recorded in March 2025. April inflation is firmly below the market expectations of 3.3 percent. RBI at its bi-monthly policy meeting in April, projected CPI-based inflation for the current fiscal FY26 at 4 per cent, assuming a normal monsoon.
Notably, inflation in the April–June quarter (Q1) is expected to dip as low as 3.6 per cent, revised sharply down from an earlier estimate of 4.5 per cent. Food prices, which account for nearly half of the consumer price basket, rose only 1.78 percent, the least since October 2021, and down from 2.69 percent in March. Even WPI averaged 2.3 percent, subscribing to the receding trend.
Prospects of the economy:
The agriculture sector is expected to rebound to a growth of 3.8 per cent in FY25. The industrial sector is estimated to grow by 6.2 per cent in FY25. Strong growth rates in construction activities and electricity, gas, water supply, and other utility services are expected to support industrial expansion.
On a yearly basis services sector grew by 7.2 per cent in FY25 as against 9.0 per cent in FY24. The manufacturing sector has always been a cause of concern. Its HSBC India Manufacturing PMI was down to 57.6 in May 2025 from 58.2 in April. Service sector PMI clocks 58.2 in April, a notch lower than 58.5 recorded in March 2025. RBI projections of GDP for FY26 are 6.5 percent, and inflation is expected to be 4 percent. IMF expects GDP to grow at 6.2 percent while the World Bank expects India to grow at 6.3 percent in FY26.OECD is more optimistic about the GDP of India growing at 6.4 percent in FY26. According to the IMF, India is still known to be the fastest-growing large economy, which is now the 4th largest economy, surpassing Japan and a notch below Germany.
External Sector:
In an interconnected financial system, it is necessary to understand the linkages of the domestic economy with the rest of the world. RBI has been cutting rates since February 2025, while the US Federal Reserve has held the federal funds rate steady in a range of 4.25 percent to 4.50 percent in the last 3 FOMC meetings since December 2024, after lowering it by one percent.
The last mile disinflation journey was tough, and US inflation reached 2.1 percent in April 2025, close to its target of two percent. UK inflation shot back to 3.5 percent in April 2025, up from 2.6 percent in March 2025. It may prompt the Bank of England to keep the rates steady until the inflation drops. ECB too began rate cuts in June 2024 and has been giving priority to price stability. Its inflation is at 2.2 percent in April against a target of 2 percent. On 17th April 2025, it had cut rates by 25 basis points, which was effective from 23 April 2025.
Way forward:
Notably, the GDP of 6.5 percent in FY25 is below 9.2 percent in FY24 and 7.6 percent in FY23. Since the upside risks to inflation cannot be ruled out due to the sensitivity of food inflation, a close to 50 percent weightage in the basket. Balancing growth–inflation dynamics will need a lot of forward data and market intelligence inputs to find a common ground.
But given the potentiality of the economy to be unleashed, thrust on growth and balancing it well with inflation will call for a further rate cut in the upcoming monetary policy review. Having already cut the repo rate by 50 basis points by bringing it down to 6 percent, going by the macroeconomic developments, another 25-basis-point repo rate cut is imminent. There are, of course, bullish views that the RBI may be aggressive in going for a 50-basis-point rate cut, which may not look realistic. The external sector dynamics amid tariff tussle and geopolitical risks could pose unanticipated risks.
RBI has changed the stance of monetary policy in April to 'accommodative' and is providing adequate liquidity from time to time to ensure efficient and quick transmission of policy rates. It has injected Rs. 6.6 lakh crore into the system by using tools like open market operations (OMO), variable rate repo (VRR) auctions, and dollar-rupee swaps to inject liquidity in the banking system. Despite adequate liquidity, bank credit growth moderated to 11.2 percent in April 2025, a decrease from the 15.3 percent growth seen in the same period the previous year. This slowdown was observed across various sectors, including retail loans, personal loans, and industry credit. However, certain sectors like loans against jewelry and renewable energy experienced substantial growth.
The latest RBI guidelines on Gold Loans should be able to enable better risk management as the loan-to-value (LTV) ratio is fixed at 75 percent. Though the near-term impact for some of the NBFCs could be challenging but in the long run, it will be inculcating a better credit risk culture. The new LCR norms are now made effective from April 1, 2026, providing enough time for banks to plan the structural liquidity pattern.
Banks should focus on finding ways to increase the flow of credit to productive sectors of the economy, with a focus on manufacturing, particularly to MSMEs. The impending lower interest rate regime should help banks to raise funds at a lower cost that can be passed on to borrowers to push the credit growth and stimulate the economy.
All pointers are signifying the imminent rate cut of 25 basis points now unless the RBI goes aggressive to opt for a 50 basis points. A calibrated reduction of interest rates is desirable to enable efficient transmission of rates and provide latitude to markets to adjust their cost dynamics. However,, a low-interest rate regime is a welcome recipe for growth.
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Views expressed above are the author's own.