RBI cuts policy rate by 25 bps to 6%, changes stance to support growth

'Decisive improvement' in inflation outlook, says MPC as India braces for impact of US tariffs

The Reserve Bank of India (RBI) lowered its key repo rate on Wednesday for a second consecutive time and changed its monetary policy stance to accommodative from neutral, signalling room for more cuts ahead to support growth that is likely to face pressure in the face of US tariffs.

 

The RBI’s six-member monetary policy committee (MPC) cut the rate to 6 per cent, noting there was a “decisive improvement” in inflation outlook.

 

“Inflation is currently below the target due to sharp decline in food inflation, growth is still on a recovery path. Amid benign inflation outlook, the monetary policy committee continues to support growth,” said RBI Governor Sanjay Malhotra, in his statement. The stance should not be associated with the liquidity situation, he said.

 

“The MPC noted that inflation is currently below the target, supported by a sharp fall in food inflation. Moreover, there is a decisive improvement in the inflation outlook. As per projections, there is now a greater confidence of a durable alignment of headline inflation with the target of 4 per cent over a 12-month horizon,” said the monetary policy statement. 

Also Read: RBI MPC meeting LIVE

 

“On the other hand, impeded by a challenging global environment, growth is still on a recovery path after an underwhelming performance in the first half of 2024-25. While the risks are evenly balanced around the baseline projections of growth, uncertainties remain high 3 in the wake of the recent spurt in global volatility. In such challenging global economic conditions, the benign inflation and moderate growth outlook demands that the MPC continues to support growth,” it said.

 

The RBI now estimates growth at 6.5 per cent, slightly lower than its earlier estimate of 6.7 per cent. It sees inflation at 4 per cent compared to 4.2 per cent earlier.

 

"The MPC’s decision to ease repo rate by 25 bps and shift its stance to accommodative is in line with expectations. We note the increasing global turmoil and its spillovers to the Indian growth slowdown will necessitate the MPC for deeper rate cuts. We see scope for additional 75-100bp of rate cuts in the year ahead depending on the scale of global slowdown," said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

 

Headline inflation fell to a seven-month low of 3.61 per cent in February, down from 4.31 per cent in January, as food price pressures eased. This marked the first time since August 2024 that inflation dropped below the central bank’s medium-term target of 4 per cent.

 

The net liquidity in the banking system was in a surplus of Rs. 1.32 trillion on Tuesday, according to the latest data by the central bank. The banking system's liquidity shifted to surplus after more than four months in April, driven by government spending and the central bank's ongoing efforts to inject liquidity through dollar-rupee buy/sell swap auctions, Open Market Operations, and variable rate repo auctions.

 

The MPC cut the 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 per cent. This was done to keep a lid on the inflation rate and bring it back to the medium-term target of 4 per cent.