On June 6, 2025, the Reserve Bank of India (RBI) implemented a significant monetary policy adjustment by reducing the benchmark repo rate by 50 basis points to 5.5%. This is the third consecutive rate cut in 2025, taking the total reduction to 100 basis points since February. Additionally, the RBI reduced the cash reserve ratio (CRR) by 100 basis points to 3% to increase liquidity in the banking system.
RBI’s Monetary Policy Decision
The Reserve Bank of India of India, in its Annual Report for FY 2024-25, notes that the average headline inflation in FY 2024-25 moderated to 4.6% from 5.4% in the previous year. It is interesting to see that the global headline inflation has been consistently on the rise since October 2024. However, India’s headline inflation has been on a steep decline in the same period. In fact, India’s headline inflation rates were 3.79%, 3.25% and 2.92% in February, March and April, respectively, extending the decline shown in the chart.
Source: World Economic Outlook (IMF) – April 2025, RBI Annual Report 2024-25
The repo rate is mostly used to regulate the credit supply in the economy. If inflation is on the rise, the central bank increases the repo rate to limit the money supply and vice versa.
In light of the above-mentioned statistics, the RBI, in its Monetary Policy Committee Meeting (4-6 June 2025), decided to cut the policy repo rate by 50 basis points to 5.5%. This is the third time in this calendar year that the rate cut has taken place. In April, the CPI was 2.92%, very close to the lower band of the RBI’s inflation targeting framework. That’s why, the RBI has gone with a 50-basis-point reduction this time to boost economic activity.
Highlights of the RBI monetary policy decision
Repo rate reduction: The repo rate now stands at 5.5%. The move was decided majority within the Monetary Policy Committee (MPC), with one member advocating a smaller reduction of 25 basis points.
CRR cut: The CRR has been reduced from 4% to 3%, to be implemented. The measure is expected to release about ₹2.5 lakh crore into the banking system by November 2025.
Change in policy stance: The RBI has changed its monetary policy stance from ‘accommodative’ to ‘neutral’, indicating a more balanced approach in future policy decisions.
Rationale Behind the Policy Changes
The RBI’s decision is influenced by several economic indicators:
- Inflation Trends: Consumer Price Index (CPI) inflation has been revised downward to 3.7% for the fiscal year ending March 2026, providing the central bank with room to maneuver.
- Economic Growth: The RBI annual growth rate has slowed to 6.5% from 9.2% the previous year, prompting measures to stimulate economic activity.
Implications for Consumers and Investors
- Loan Borrowers: The reduction in the repo rate is expected to lead to lower interest rates on loans, resulting in decreased Equated Monthly Instalments (EMIs) for borrowers.
- Fixed Deposit Investors: Conversely, fixed deposit (FD) interest rates are anticipated to decline, affecting returns for conservative investors. Some banks currently offer FD rates exceeding 8%, with certain institutions providing up to 9.10% for senior citizens. Investors may consider locking in these rates before further reductions occur.
Market and Sectoral Impact
The policy measures are expected to have a broad impact across various sectors:
- Banking Sector: The infusion of liquidity through the CRR cut is likely to enhance banks’ lending capacities and margins
- Real Estate and Infrastructure: Lower borrowing costs may stimulate demand in capital-intensive sectors such as real estate and infrastructure development
- Automobile Industry: Anticipation of increased consumer spending has already led to a surge in auto sector stocks, with companies like Maruti Suzuki and Ashok Leyland experiencing notable gains.
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