Amid slowing growth and muted inflation, the Reserve Bank of India (RBI), in a surprise move, delivered a bigger-than-expected repo rate cut of 50 basis points on Friday, June 6. Marking a third straight reduction, the six-member monetary policy committee (MPC), led by Governor Sanjay Malhotra, lowered the policy rate to 5.50%.

With today's cut, the RBI MPC has reduced rates by 100 basis points in 2025, to provide support to the economy amid global headwinds such as trade war worries.

The RBI first delivered a quarter-point reduction in February, its first cut since May 2020. It made a similar-sized cut in April.

Slowing down inflation allowed the RBI MPC to not only cut rates for a third consecutive time in June, but also deliver a larger-than-expected 50 bps reduction in the key repo rate. Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) shall stand adjusted to 5.25% and the marginal standing facility (MSF) rate and the Bank Rate to 5.75%.

Governor Malhotra said that after reducing repo by 100 bps in quick succession, the monetary policy is left with limited space to support growth.

Meanwhile, the MPC revised its stance to 'neutral' from 'accommodative'. RBI Governor added that from now MPC will carefully assess income data and the evolving outlook to chart out future policy.

As RBI Governor Sanjay Malhotra signalled comfort on inflation and said core inflation is expected to remain benign, he lowered the CPI outlook for the financial year 2024-26 to 3.7% from 4% projected earlier.

The RBI has made adjustments to its quarterly inflation forecasts. It raised the CPI projection for Q1 FY26 to 3.9% from 3.6%, while lowering the forecast for Q2 to 3.4% from 3.9%. For Q3 FY26, the inflation outlook was slightly increased to 3.9% from 3.8%, and for Q4, it was revised upward to 4.4% from 4.2%.

The RBI, in its second policy meeting of FY26, maintained the real GDP growth at 6.5%. The RBI Governor maintained the growth forecasts for all its quarters as follows: Q1 FY26 at 6.5%, Q2 FY26 at 6.7%, Q3 FY26 at 6.6%, and Q4 FY26 at 6.3%.

The Indian economy has been resilient in the face of geopolitical risks, with GDP growth surging to 7.4% in the January-March quarter. However, Malhotra said that growth remains lower than our aspirations amidst a challenging global environment and heightened uncertainty.

The central bank, in another unexpected move, cut the cash reserve ratio (CRR) by 100 bps to 3% to accelerate policy transmission and boost lending. The CRR reduction would be done in four equal tranches starting from September to November, and would release ?2.5 lakh crore in the banking system, RBI Governor Sanjay Malhotra said.

“Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market,” he added.

CRR is the proportion of deposits that banks need to set aside as cash.

The Governor also highlighted the easing of stress in unsecured loans and credit card portfolios, even as concerns in micro-finance segments persist.

“The stress witnessed earlier in retail segments like unsecured personal loans and credit card receivables portfolio has abated, while the stress in the micro-finance segment is persisting. Banks and NBFCs active in these segments are already recalibrating their business models, strengthening their credit underwriting practices and stepping up their collection efforts to avoid any excessive build-up of risks on this front in future,” Malhotra added.