RBI Cuts Repo Rate to 5.5%, Eases CRR Amid Falling Inflation and Growth Concerns

RBI Cuts Repo Rate to 5.5%, Eases CRR Amid Falling Inflation and Growth Concerns

In a bold move aimed at stimulating economic momentum, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has slashed the repo rate by 50 basis points, bringing it down from 6% to 5.5%. The surprise rate cut, announced on Thursday, marks the third consecutive reduction following two earlier 25 bps cuts in February and April 2025.

This jumbo rate cut comes on the back of easing retail inflation, stronger-than-expected Q4 GDP numbers, and ongoing global trade tensions.

A Shift in Monetary Policy Stance

The RBI also changed its policy stance from “calibrated tightening” to “neutral”, signaling room for further accommodation if economic conditions warrant it.

“The decision reflects the need to support growth while inflation remains well within the target range,” said RBI Governor Sanjay Malhotra, during the post-policy press conference.

As part of the policy package:

• The Standing Deposit Facility (SDF) rate has been revised to 5.25%
• The Marginal Standing Facility (MSF) and Bank Rate are now set at 5.75%

Inflation Eases, Enabling Deeper Cuts

One of the key drivers of the aggressive rate cut has been the sharp moderation in inflation. Retail inflation has dropped well below the RBI’s medium-term target of 4%, creating ample headroom for easing.

The MPC has now revised its FY26 inflation projection downward from 4% to a range of 3.7%–4%.

Governor Malhotra emphasized that, despite external risks, domestic price pressures have softened, and imported inflation appears manageable.

CRR Cut in Four Tranches to Ease Liquidity

In addition to the repo rate cut, the RBI announced a 100 basis points reduction in the Cash Reserve Ratio (CRR) to be rolled out in four 25 bps tranches on:

• September 6
• October 4
• November 1
• November 29

This move is designed to infuse liquidity into the banking system, enabling greater lending to consumers and businesses. It’s expected to complement the repo rate cut in enhancing credit flow across sectors.

Growth: Strong Q4, But Slower FY25

Recent government data showed that India’s GDP grew 7.4% in Q4 FY25, beating forecasts and offering a silver lining. However, full-year growth came in at 6.5%, a four-year low, albeit in line with the second advanced estimates.

Governor Malhotra acknowledged the slowdown but called it “temporary and transitional.” The unchanged FY26 GDP forecast at 6.5% reflects the RBI’s cautious optimism that the recent policy actions will help revive broader growth.

External Risks Loom: US Trade Talks and Global Uncertainty

Global factors, including the Trump administration’s reciprocal tariff policies, continue to weigh on India’s economic outlook. Although a temporary pause until July 8 is in place, uncertainty persists.

India is currently negotiating a trade agreement with the United States, and the first tranche is expected to be finalized before the pause ends. The RBI’s recent bulletin stated:

“The trade deal has the potential to turn headwinds into tailwinds for India’s export sector.”

The RBI Governor echoed this sentiment, noting that “India’s strength lies in its demography, digital transformation, and domestic demand.”

Market Reaction and Analyst Views

While many analysts had anticipated a 25 bps cut, the 50 bps decision surprised markets, prompting a mixed reaction.

“The RBI has gone all in—this is a clear message that growth support is now the top priority,” said a senior economist at Kotak Mahindra Bank.

Stock markets reacted positively, with banking and auto stocks rallying on hopes of cheaper credit and higher consumption.