RBI DELIVERS SURPRISE 50BPS REPO RATE CUT: SANJAY MALHOTRA’S STRATEGIC MOVE
In a move that stunned markets and delighted borrowers, Reserve Bank of India (RBI) Governor Sanjay Malhotra announced a sharp 50 basis points (bps) cut in the repo rate, bringing it down to 5.5%—the lowest level seen in three years. The Monetary Policy Committee (MPC) also slashed the Cash Reserve Ratio (CRR) by 100 bps to 3%, releasing ₹2.5 lakh crore into the banking system to boost lending and liquidity. The RBI’s policy stance shifted from “accommodative” to “neutral,” signaling a new phase in India’s monetary policy as the central bank seeks to balance growth and inflation.
The Reserve Bank of India’s decision to cut the repo rate by 50 basis points marks a significant shift in the country’s monetary policy stance. This aggressive move is aimed at revitalizing economic growth by making borrowing cheaper for businesses and consumers alike. Lower interest rates are expected to spur investment, increase consumption, and ultimately drive GDP growth in the coming quarters.
One of the immediate beneficiaries of the rate cut will be the housing sector. Homebuyers with floating-rate loans linked to the repo rate or external benchmark lending rates can expect a reduction in their EMIs, easing their financial burden. This could stimulate demand in the real estate market, which has been sluggish due to high borrowing costs and cautious consumer sentiment.
Corporate borrowers will also gain from the rate cut, as cheaper credit will reduce their cost of capital. This can encourage companies to expand operations, invest in new projects, and hire more employees. Sectors like manufacturing, infrastructure, and services, which are sensitive to interest rates, are likely to see increased activity as a result.
INFLATION EASES, RBI FRONTLOADS RATE CUTS TO BOOST ECONOMY
The RBI’s decision comes amid a steady decline in consumer price inflation, which dropped to 3.16% in April—well below the central bank’s 4% comfort level and the lowest in six years. Food prices have been a major driver of this moderation, aided by a favorable monsoon and declining global commodity prices. With headline inflation now under control, the MPC saw room for a more aggressive rate cut to stimulate domestic demand and investment, especially as global economic uncertainties and trade tensions persist.
Governor Malhotra emphasized that “growth is lower than our aspirations,” and that the frontloaded rate cut is designed to “stimulate domestic consumption and investment” at a time when India’s GDP growth, though still robust at 6.5%, has slowed from the post-pandemic highs of 9.2%. The policy review kept the GDP growth forecast unchanged at 6.5% for FY26, but revised the inflation projection downward to 3.7%.
The cut in the Cash Reserve Ratio (CRR) by 100 basis points complements the repo rate reduction by injecting liquidity into the banking system. This additional ₹2.5 lakh crore will enable banks to lend more freely, addressing liquidity constraints that have hampered credit growth. Enhanced liquidity is particularly crucial for small and medium enterprises (SMEs), which often face challenges in securing affordable financing.
While borrowers stand to benefit, savers may face lower returns on fixed deposits and savings accounts as banks adjust their interest rates downward. This shift could prompt investors to explore alternative investment avenues such as mutual funds, equities, or real estate to seek better returns, potentially boosting capital markets.
The RBI’s move also reflects confidence in the inflation outlook. With headline inflation easing below the 4% target, the central bank has the flexibility to prioritize growth without compromising price stability. However, it remains vigilant against upside risks, including volatile commodity prices and supply chain disruptions that could reignite inflationary pressures.
BANKS TO CUT LOAN RATES, HOME LOAN EMIS TO DROP
The immediate impact of the repo rate cut will be felt by borrowers, especially those with repo-linked home loans and other retail credit. Banks are expected to quickly pass on the benefit of lower rates, making new loans cheaper and reducing EMIs for millions of Indians. Those with loans linked to the external benchmark lending rate (EBLR) will see the fastest relief, while borrowers on older MCLR or base rate systems may experience a lag.
Axis Bank’s Rajiv Anand noted that the CRR cut will also ease funding costs for banks and accelerate the transmission of lower policy rates to customers. However, savers and depositors may see lower returns on fixed deposits and savings accounts as banks adjust rates downward in response to the RBI’s move.
Global economic uncertainties, including geopolitical tensions and tightening monetary policies in advanced economies, continue to pose risks to India’s growth trajectory. The RBI’s proactive rate cut is a preemptive measure to cushion the domestic economy against external shocks and maintain momentum in key sectors.
The transmission of policy rate cuts to end consumers is critical for the RBI’s strategy to succeed. Historically, transmission has been uneven, with banks sometimes slow to reduce lending rates. The recent CRR cut and regulatory nudges aim to accelerate this process, ensuring that the benefits of lower policy rates reach borrowers promptly.
Financial markets have welcomed the RBI’s bold action, with equities rallying and bond yields softening. This positive sentiment reflects investor optimism about improved corporate earnings and economic prospects. However, sustained market confidence will depend on continued policy support and stable macroeconomic conditions.
Looking ahead, the RBI has signaled a data-driven approach, indicating that future rate decisions will hinge on inflation trends, growth indicators, and global developments. This balanced stance provides flexibility to tighten or ease monetary policy as needed, helping to navigate the complex economic landscape while fostering sustainable growth.
The RBI’s substantial rate cut is also expected to have a ripple effect on consumer sentiment across the country. With lower interest rates on personal, auto, and education loans, households may feel more confident about making big-ticket purchases or investing in higher education. This boost in consumer confidence can translate into higher spending, which is a key driver of India’s domestic-led growth model.
For the banking sector, the dual impact of a repo rate and CRR cut should help ease margin pressures that have built up due to sluggish credit growth over the past year. Banks will have more room to lend, and the increased liquidity can support a broader range of borrowers, including those in rural and semi-urban areas who often face credit constraints. This could also lead to increased competition among banks, potentially resulting in more attractive loan products for customers.
On the fiscal front, the government may find some relief as lower interest rates reduce the cost of servicing public debt. This can free up resources for development spending, infrastructure projects, and social welfare schemes, supporting the government’s broader economic agenda. However, fiscal prudence will remain important to ensure that increased spending does not stoke inflationary pressures in the medium term.
MARKET REACTION: STOCKS RALLY, EXPERTS HAIL RBI’S BOLDNESS
The stock markets responded positively to the RBI’s announcement, with the Nifty and Sensex hitting new highs and the Nifty Bank index surging on expectations of improved credit growth and profitability for banks. Leading bankers and economists described the move as “bold and strategic,” with Uday Kotak calling it a “game-changer” for the economy.
Experts highlighted that the RBI’s aggressive stance was justified by the sharp fall in inflation and the need to support growth amid global headwinds. The central bank’s decision to shift to a neutral policy stance suggests that future rate moves will depend on evolving data, giving the RBI flexibility to respond to new challenges.
Internationally, the RBI’s move positions India as a proactive and growth-oriented economy, especially at a time when many central banks are adopting a more cautious or even hawkish stance. This could attract foreign investors seeking higher returns in emerging markets, potentially leading to increased capital inflows and a stronger rupee. However, the central bank will need to monitor exchange rate volatility and external sector risks closely.
The real estate and construction sectors, which are major employers in India, stand to benefit significantly from the rate cut. Lower borrowing costs can revive stalled projects, encourage new launches, and create more jobs. This, in turn, can have a positive multiplier effect on allied industries such as cement, steel, and consumer durables, further stimulating economic activity.
Finally, the RBI’s bold policy action under Governor Sanjay Malhotra’s leadership sends a clear signal of confidence and agility in navigating complex economic challenges. By acting decisively and communicating transparently, the central bank has reinforced its commitment to supporting growth, maintaining price stability, and ensuring financial sector resilience—key pillars for India’s continued economic success.
WHAT LED TO THE 50BPS CUT? RBI’S RATIONALE EXPLAINED
The MPC’s decision was driven by several factors:
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Sustained decline in inflation: Headline CPI inflation has eased from above the RBI’s tolerance band in late 2024 to well below target, with broad-based moderation across sectors.
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Slowing growth: While India remains the fastest-growing major economy, GDP growth has slowed, and private consumption and investment need a boost.
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Global uncertainties: Trade tensions, volatile oil prices, and global monetary tightening have increased risks to India’s growth outlook.
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Improved liquidity: The CRR cut frees up additional resources for banks to lend, supporting credit flow to the real economy.
Governor Malhotra reiterated that the central bank would remain data-dependent and act as needed to support growth while keeping inflation within target.
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