The RBI’s latest rate action is a strong signal of its intent to support growth in a cautious global environment. If executed well, this policy move could lay the foundation for a broader economic revival in the second half of FY26.
The Reserve Bank of India’s (RBI) bold 50 bps repo rate cut on Friday marked the third consecutive rate cut this year and signals a strong intent by the central bank to stimulate the economic growth. Governor Sanjay Malhotra, a career bureaucrat who took over the reins from Shaktikanta Das, has so far delivered a 100-bps cut in the policy rate, bringing it to 5.5 per cent.
The first revision in February came after a five-year gap amid some friction between the government and RBI with the latter under Das’ regime batting for price stability and not willing to slash rates. Meanwhile, the government’s view was in favour of cuts to increase consumption and kickstart the economy.
A lower rate would enable consumers to take credit with lower EMIs. The demand could increase for vehicle, personal and related loans.
A 100-bps cut is a strong impetus for India Inc as it would lower the cost of credit for businesses and is expected to increase private investments. There have been persistent concerns over slow private investment, uneven consumption trends, and global economic uncertainties.
However, there is also a view that the cut has come to mitigate the impact of recession that could ensue after the 90-day pause on tariff ends. More global chaos is expected to unfold.
RBI goes aggressive
In its June 2025 monetary policy, the RBI adopted an aggressive stance delivering a surprising 50 bps reduction in the repo rate. In the February and April MPCs, RBI cut the rates by 25 bps each. The banking regulator has also changed its stance from accommodative to neutral which means that there is unlikely to be any cut in subsequent policies.
While rate cut is positive for borrowers, it is negative for banks or lending institutions who rely on interest income for their revenues. A lower interest rate, lowers their interest income effectively reducing the margins.
Moreover, the banks reduce interest on deposits which makes it less incentive for people to park their money in fixed deposits or savings account. Since banks rely on these deposits for lending purposes, a drop in deposits forces them to borrow from the markets which then increase their operational cost.
However, the RBI addressed this issue by cutting the Cash Reserve Ratio (CRR) requirement by 100 bps which will be implemented in four tranches. CRR is the percentage of a bank’s total deposits that must be kept in reserve, in the form of cash, with the RBI. This amount is not available for lending or investment. It acts as a safety buffer and a tool to manage liquidity in the banking system.
This will leave surplus cash with them to lend and increase system liquidity. RBI has estimated this additional liquidity at Rs 2.5 lakh crore.
The rationale behind the move is the consumer price index (CPI) inflation, which has remained below the RBI’s 4 per cent medium-term target. For April, CPI stood at 3.8 per cent, giving the central bank room to manoeuvre.
However, the real reason is the slowing growth as India’ GDP growth for Q4FY25 came in at 7.4 per cent, slightly below expectations. While still strong, the pace showed early signs of moderation in domestic demand.
Among external factors is the geopolitical tensions and uncertainty over US interest rate policy, which has made global demand erratic, impacting Indian exports and investments.
Impact on the economy
The combined impact of the repo and CRR cut is expected to be multi-fold. One is boosting capital expenditure and discretionary spending.
With banks required to park less with the RBI due to the CRR cut, more funds will be available for lending, easing credit bottlenecks.
Higher demand will increase investments for building capacities and also optimum utilization of existing capacities.
The private investments have been below expectation owing to slower consumption spike than it was supposed to, disincentivising industries to undertake more of it.
Urban consumer sentiment in the country remained largely steady in May 2025, even as caution tempers optimism about the economic outlook, according to the RBI’s latest Urban Consumer Confidence Survey (UCCS). While perceptions of current economic conditions showed a minor dip, forward-looking sentiment has gained noticeable traction.
The Consumer Confidence Index (CCI), which captures how consumers assess the present environment, slipped marginally from 95.5 in March to 95.4 in May — a negligible decline, signalling a broadly unchanged mood on the ground. However, the forward-looking Future Expectations Index (FEI) — which gauges anticipated trends in employment, income, spending, and overall economic prospects — rose to 123.4 in May from 122.4 in March, reflecting a meaningful improvement in consumer outlook.
The data, drawn from responses of 6,090 individuals across 19 metropolitan areas between May 2 and May 11, indicates that while immediate sentiment has plateaued, urban households are becoming increasingly hopeful about future conditions
Strong tailwinds
For affordable housing, the move could give a strong push to first-time homebuyers. In the commercial real estate segment, improved business sentiment and lower borrowing costs can aid commercial property uptake and new project launches. Moreover, builders with high leverage stand to benefit from lower financing costs, improving profitability and cash flows and thus timely execution of projects.
For auto sector, vehicle financing may jump. Already, over 70 per cent of car and two-wheeler purchases are financed through loans. It can also lead to inventory clearance and not leave buying activity to festive or marriage season.
While mid-level and high-end cars have showed robust growth since Covid-19, the hardest hit segment is entry-level two-Wheeler and cars. These sub-segments are expected to benefit the most from rate cuts, given their sensitivity to financing terms.
Review of earlier rate cuts
The impact of two 25 bps cuts earlier this year has not fully played out and the real difference would be seen over the next few quarters. The transmission of rate cuts has been partial as the banks passed on only 60-65 per cent of the benefit to borrowers.
The quarterly earnings of listed companies reveal that there was some pick-up in retail loans, though the corporate credit growth remained subdued.
All eyes will now be on how quickly and fully banks pass on the rate cuts.
The incoming monsoon and rural demand is expected to amplify the rate cut benefits by lifting rural incomes and demand.
Oil prices, US Fed policy, and geopolitical events will continue to shape India’s macroeconomic outlook.
Meanwhile, sustained low inflation is critical for any further rate action. The RBI will be watching food and fuel prices closely.
In a nutshell, the RBI’s latest rate action is a strong signal of its intent to support growth in a cautious global environment. If executed well, this policy move could lay the foundation for a broader economic revival in the second half of FY26.
Both the RBI and the government are speaking in one voice. In the February 2025 budget, Finance Minister Nirmala Sitharaman extended the income tax benefit or rebate up to Rs 12 lakh and with both these factors working together, the hope of higher consumption has lifted. How it pans out, we will see.