RBI cuts repo rate by 50 bps to 5.5%, changes policy stance to neutral

Cash reserve ratio cut by 100 basis points to 3%, adding to already surplus liquidity

The Reserve Bank of India (RBI) cut the repo rate by a larger-than-expected 50 basis points on Friday, a third consecutive reduction, and changed the monetary policy stance to “neutral” from “accommodative” as muted inflation provided space for policymakers to focus on supporting economic growth.

 

The Monetary Policy Committee (MPC), which consists of three RBI officials and three external members, cut the repo rate to 5.50 per cent. It cut the cash reserve ratio (CRR) by 100 basis points to 3 per cent, adding to already surplus liquidity.

 

“The MPC decided to front load the rate cut to support growth,” said RBI Governor Sanjay Malhotra in his monetary policy statement. The reduction in CRR is expected to infuse Rs 2.5 trillion of primary liquidity in the banking system by the end of November, he said.

 

 

Inflation is expected to align with RBI’s target of 4 per cent on a durable basis on the back of fall in international commodity prices. Domestic food inflation is expected to remain benign. For FY26, GDP growth is projected at 6.5 per cent, unchanged from the RBI’s previous forecast. The central bank expects inflation to average 3.7 per cent in FY26, lower than its previous projection of 4 per cent. 

   

 

India’s retail inflation eased to 3.16 per cent in April from 3.34 per cent in March, driven by a sharp decline in vegetable and pulse prices. It was the lowest Consumer Price Index inflation since July 2019, when it was 3.15 per cent. Food inflation has also dropped, hitting a 42-month low of 1.78 per cent in April, compared to 2.69 per cent in March. The decline was led by an 11 per cent year-on-year fall in vegetable prices and a 5.23 per cent drop in pulses — the steepest decline in over six years.

 

The MPC cut the policy repo rate by 25 basis points in February, after keeping it unchanged for 11 consecutive meetings. This followed a 250 basis point increase from May 2022 to February 2023. Since April 2023, it had held the repo rate steady at 6.5 percent. This was done to keep a lid on the inflation rate and bring it back to the medium-term target of 4 per cent.