Rate cut hat-trick: RBI goes big with 0.5% cut, stance turns neutral

In a significant move aimed at bolstering growth amid a benign inflation outlook, the Reserve Bank of India (RBI) on June 6 slashed the repo rate by 50 basis points (bps) to 5.50 per cent from 6 per cent.

This marks the third consecutive rate cut by the RBI’s Monetary Policy Committee (MPC), bringing the cumulative reduction to 100 bps since February 2025. The central bank also announced a shift in its policy stance from ‘accommodative’ to ‘neutral’.

RBI Governor Sanjay Malhotra said the front-loaded rate cut was necessitated by a clear moderation in inflation and persistent global uncertainties impacting domestic growth.

He noted that “inflation has softened significantly over the last six months”, with the latest Consumer Price Index (CPI) reading at 3.2 per cent, well below RBI’s 4 per cent target.

“The near-term and medium-term outlook gives us confidence of a durable alignment of inflation with the target. It may even undershoot the margin,” Malhotra said.

GDP growth forecast unchanged

Despite the rate cut, the RBI maintained its FY26 GDP growth forecast at 6.5 per cent, citing resilience in domestic activity. Private consumption remains healthy, and both the services and agriculture sectors are expected to sustain momentum.

RBI also kept the quarterly projections unchanged at 6.5 per cent for Q1, 6.7 per cent for Q2, 6.6 per cent for Q3 and 6.3 per cent for Q4.

This is in comparison with Moody’s Ratings’ Indian economic growth projection between 5.5 per cent to 6.5 per cent and the IMF’s projection of 6.2 per cent for the calendar year 2025.

Malhotra noted strong performance in merchandise exports in April and a revival in investment activity. He acknowledged that while rural demand is steady, urban demand is showing signs of further improvement.

Inflation outlook revised downward

The RBI has sharply revised its FY26 inflation projection down to 3.7 per cent rom the previous estimate of 4 per cent. According to the governor, food prices have eased and core inflation remains subdued.

Quarterly inflation forecasts have also been moderated:

Q1 FY26: 2.9 per cent (down from 3.6 per cent)

Q2 FY26: 3.4 per cent (down from 3.9 per cent)

Q3 FY26: 3.9 per cent (unchanged)

Q4 FY26: 4.4 per cent (unchanged)

The RBI attributed the outlook to a likely above-normal monsoon, record wheat production, and easing global commodity prices.

However, he also warned of risks from weather uncertainties and volatile global trade conditions.

CRR cut to inject liquidity

In a surprise move, the RBI also announced a 100 bps cut in the Cash Reserve Ratio (CRR) to 3 per cent, which will release ₹2.5 lakh crore ($291 billion) of primary liquidity into the system.

This reduction in CRR will be done in four tranches. The step is expected to reduce the cost of funds for banks and support more effective transmission of monetary policy.

“This CRR cut will not only augment durable liquidity but also improve funding conditions for businesses and consumers alike,” Malhotra said.

While the RBI's tone was broadly optimistic, it flagged multiple risks, including fragile global trade, rising geopolitical tensions, and uncertainties related to AI-driven disruptions in financial markets. Malhotra emphasised the need for constant vigilance and data-driven decision-making.

“We have very limited space left for further monetary accommodation. From here, every move will depend on incoming data and evolving macroeconomic realities,” he added.

Indian stock markets welcomed the announcement, with benchmark indices the Sensex and the Nifty 50 both rising nearly 0.7% at 11:00 am IST.