Three factors may have led RBI Governor Sanjay Malhotra and MPC team to play the unconventional card as they cut repo rate by 50 bps and CRR by a percent. Will this work to achieve ‘aspirational’ growth in a global slowdown economy amid Trump’s ‘reciprocal’ tariffs?
Reserve Bank of India Governor Sanjay Malhotra along with members of the monetary policy committee (MPC) could have played the conventional card: cut repo rate by 25 basis points (bps) for the third straight time, let India’s growth engine run on the monetary easing steam and reduce interest rate of similar size in the next policy in August.
Three things may have upset this line of thinking. There is this conviction, as expressed by Malhotra, that the inflation war had been won. There is also this anxiety that growth could be adversely hit due to US President Donald Trump’s call for reciprocal tariffs. The third thought would have been to make cheap money available to borrowers so that India does not lose the opportunity of rapidly moving up the ladder to become the third-largest economy in the world.
So, Malhotra and his MPC team did the unexpected: cut repo rate by a mega 50 bps to bring it down to 5.5% and reduce cash reserve ratio (CRR) by 100 basis points to 3%. The moves are supposed to boost consumption, spur businesses to invest, expand the reservoir of lendable funds for banks and trigger credit growth as cost of money falls and the banking system gets durable liquidity.
The RBI has largely exhausted all the policy levers that could drive growth, probably keeping in mind the fact that Trump’s 90-day pause on sweeping tariffs would expire in early July. Why wait until the August policy to go for a repeat repo rate cut when inflation has cooled?
The central bank, according to Malhotra, has through its three successive monetary policies this year done what it could to prop up growth. “After having reduced the policy repo rate by 100 bps in quick succession since February 2025, under the current circumstances, monetary policy is left with very limited space to support growth,” the RBI Governor said, while announcing the bi-monthly policy.
The RBI-led MPC is most likely to press the pause button on rate-cut cycle after this, at least for the next two monetary policies. It has already changed gear from ‘accommodative’ to ‘neutral’ policy stance, meaning technically that it can move the repo rate up or down based on data indicators.
Until then, the terminal benchmark rate would be 5.5% while banks re-price loans and deposits downwards. Bringing the benchmark rate lower will raise concerns over capital inflows and put downward pressure on the Indian rupee. And what if inflation, currently under arrest and could further fall when data comes for the month of May, starts inching up?
“From here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance,” Malhotra said.
The RBI Governor, after injecting Rs 9.5 lakh crore of durable liquidity into the banking system since January this year, is keen to ensure quicker transmission of policy rates. Since the February rate cut, the average deposit rates have declined by 27 bps while lending rates on outstanding credit have come down by 17 bps. While informing that the current pace of transmission has been “better than in past cycles”, Malhotra has emphasized the need for faster pass-through. “That’s why we have front-loaded some of our actions,” he said.
Malhotra considers it important to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum. “The changed growth-inflation dynamics calls for not only continuing with the policy easing but also front-loading the rate cuts to support growth,” he said.
The cut in CRR by 1%, a big surprise to everyone as it has earlier been brought down to 3% only during an unusual situation like Covid, will also release liquidity of Rs 2.5 lakh crore to the banking system which is already flush with funds. The move, to be implemented in four equal tranches of 25 bps each from fortnights beginning 6 September, 4 October, 1 November and 29 November this year, is expected to bring down the cost of funds for banks and improve their net interest margins by at least 7 bps, as per RBI estimates.
The RBI’s worry on growth gets reflected in the latest forecast for FY26. While the central bank has reduced its inflation projection for the current fiscal to 3.7% from 4% earlier, the GDP growth estimate is unchanged at 6.5%, despite all the monetary easing measures being undertaken. Amid trade uncertainties due to Trump’s threat of reciprocal tariffs, there is fear that global growth could go lower, as studies by the World Bank and other multilateral agencies show.
Besides, Malhotra wants the measures to push growth toward a higher ‘aspirational’ trajectory of 7% to 8%.
The RBI has set the direction on interest rates and liquidity, but the big question is whether these measures will work to create credit appetite, spur private capital expenditure investments and revive consumption. Of late, credit growth has slowed and fallen to below 10%, with large companies sitting on cash and having the option of tapping market instruments, if required. Companies are reluctant to ‘overbuild’ as consumption demand remains a problem. Households require hiring and wage income to go up for consuming or borrowing more. How this vicious circle gets broken is a challenge that will perhaps require more than monetary easing.
Some concerns are being raised that cheaper money is being made available when the market is not ready to make use of it. This could lead to risks being not properly priced as banks may chase higher yields to beat low credit demand while depositors look to move away from low-earning deposits to invest in stocks. But considering that inflation has cooled to below 4% and global growth is heading towards slowdown, Malhotra and the MPC team seem to have taken a reasonable bet.
