Mumbai, India – The Reserve Bank of India (RBI) delivered a significant stimulus measure on Friday, June 6, 2025, with its Monetary Policy Committee (MPC) opting for a substantial reduction in the benchmark lending rate. In a move aimed at bolstering economic activity amidst evolving global conditions, the central bank announced a 50 basis point (bps) cut to the policy repo rate, lowering it from 6% to 5.50% with immediate effect.
The decision, reached after the latest MPC deliberations, marks a notable pivot in the central bank’s monetary policy trajectory. Alongside the rate cut, the RBI also announced a reduction in the Cash Reserve Ratio (CRR), a tool used to manage liquidity in the banking system.
Key Policy Decisions and Voting
The headline decision saw the MPC vote 5:1 in favour of the 50 bps reduction in the policy repo rate. The majority voting for the larger cut included Governor Sanjay Malhotra, Dr. Nagesh Kumar, Prof. Ram Singh, Dr. Rajiv Ranjan, and Dr. Poonam Gupta. In contrast, Saugata Bhattacharya voted for a more modest 25 bps rate cut.
This decisive action on the repo rate is complemented by a 100-bps reduction in the Cash Reserve Ratio. This CRR adjustment is projected to inject approximately ₹2.5 lakh crore of primary liquidity into the banking system. The RBI indicated that these CRR cuts would be staggered, with the full effect expected to be realized by December 2025.
Shift in Monetary Policy Stance
Perhaps equally significant as the rate cut was the RBI’s decision to change its monetary policy stance from ‘withdrawal of accommodation’ to ‘neutral’. This shift signals the central bank’s increased flexibility and readiness to respond to changing macroeconomic conditions, potentially opening the door for further policy actions depending on the economic data and inflation trajectory.
The neutral stance suggests that the RBI is no longer singularly focused on tightening liquidity or raising rates to curb inflation but is prepared to support growth if warranted, balancing inflation concerns with the need to stimulate the economy.
Revised Economic Projections
Accompanying the policy decisions were the RBI’s updated economic forecasts, reflecting the central bank’s assessment of the current and prospective economic environment. The projection for Consumer Price Index (CPI) inflation for the fiscal year 2026 (FY26) was revised downwards to 3.7% from an earlier forecast of 4%. The projection for the fourth quarter of FY26 (Q4 FY26) now stands at 4.4%.
On the growth front, the RBI maintained its estimate for India’s Gross Domestic Product (GDP) growth for the current fiscal year (FY25) at 6.5%. The projection for the next fiscal year (FY26) is also estimated at 6.5%. The central bank provided a quarterly breakdown for FY26 GDP growth, projecting 6.1% in Q1, 6.7% in Q2, 6.6% in Q3, and 6.3% in Q4.
Rationale and Context
The RBI’s decision comes against a backdrop of global economic uncertainties and the need to provide impetus to domestic growth. Lowering the repo rate typically reduces borrowing costs for banks, which is expected to be passed on to consumers and businesses, thereby encouraging investment and consumption. The injection of liquidity through the CRR cut further supports this objective by increasing the lendable resources available to banks.
The central bank noted that gross Foreign Direct Investment (FDI) saw a robust increase of 14% in FY25, indicating continued investor confidence in the Indian economy. However, the policy action underscores the RBI’s proactive approach to managing risks and ensuring sustainable growth momentum.
Governor Sanjay Malhotra stated that the decisions were carefully calibrated to balance the objectives of price stability and growth, taking into account the evolving domestic and global economic landscape. The neutral stance provides the flexibility needed to navigate future developments effectively.
Looking Ahead
The 50 bps rate cut and the shift to a neutral stance signal a clear pivot by the RBI towards a more accommodative policy stance. This move is expected to be welcomed by industry and market participants, who have been anticipating measures to support economic expansion.
The impact of these measures on inflation, credit growth, and overall economic activity will be closely monitored in the coming months. The staggered release of liquidity through the CRR adjustments is designed to ensure a smooth transmission of monetary policy impulses through the financial system. The RBI’s future policy decisions will likely hinge on the trajectory of inflation, the pace of economic growth, and global financial conditions.
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