Context:
In an effort to anchor economic confidence amid global uncertainties, the Reserve Bank of India (RBI), through its Monetary Policy Committee (MPC), delivered a bigger-than-expected policy stimulus in June 2025.
Key Policy Announcements (June 2025)
- Repo Rate Cut: 50 basis points (bps) cut to 5.5% (market expected 25 bps)
- Total rate cuts in FY26: 100 bps (25 bps in February & April, 50 bps in June)
- Cash Reserve Ratio (CRR): Reduced by 100 bps to 3%, in four tranches
- Adds ₹2.5 trillion in durable liquidity
- Policy Stance Changed: From accommodative to neutral
RBI’s Recent Liquidity Measures
- ₹9.5 trillion liquidity infused since the start of 2025
- Weighted Average Call Rate (WACR): Hovering near the lower end of the LAF corridor, reflecting ample liquidity
- Monetary transmission to lending rates is expected to improve further
Has the RBI Reached the Terminal Rate?
Key Arguments
- The frontloaded rate cut and CRR reduction suggest RBI has done most of the heavy lifting.
- The shift to a neutral stance signals limited room for future rate cuts.
- Inflation Projections:
- April 2025 CPI inflation eased to 3.2%
- FY26 revised inflation forecast: 3.7% (from 4%)
- H2FY26 inflation expected to average slightly above 4%
- RBI’s estimated neutral real rate: 1.4%–1.9%
- With projected inflation at 3.7%, current policy rate aligns with neutral zone
Growth Outlook:
- FY26 GDP growth estimate: Retained at 6.5%
- FY25 GDP growth was also 6.5%, indicating monetary policy alone may not lift potential growth.
- Medium-term challenge: Boost potential GDP beyond 7%, which will require non-monetary interventions (e.g., structural reforms, capex boost)
