RBI throws a surprise party with big rate cut and Rs 2.5 lakh crore boost
The Reserve Bank of India (RBI) Friday shed its customary conservatism to deliver double the policy rate cut than anticipated by investors, amid receding inflation concerns. It also opened the liquidity floodgates to add Rs 2.5 lakh crore for onward lending to help restore the pace of economic expansion near the 8% aspirational threshold.The Monetary Policy Committee (MPC) also changed its stance to 'neutral' from 'accommodative' in what appears to be a signal that, amid expected global uncertainties, Mint Road has frontloaded its policy actions and would hit the pause button unless incoming datasets compel it to take further rate measures."Strong macroeconomic fundamentals and benign inflation outlook provide space to monetary policy to support growth, while remaining consistent with the goal of price stability," said RBI governor Sanjay Malhotra, who has delivered three consecutive rate cuts in each of the reviews he has chaired since February. "The changed growth-inflation dynamics calls for not only continuing with policy easing, but also frontloading rate cuts to support growth." The half-a-percentage-point reduction in policy rates to 5.5% is expected to immediately lower home loan rates for borrowers with floating-rate loans, and borrowing costs for small entrepreneurs. 
One basis point is a hundredth of a percentage point. The rate cut is expected to immediately lower home loan rates for borrowers with floating rate loans, and borrowing costs for small entrepreneurs. At the same time, banks will start reducing deposit rates to protect margins.Easing food prices and benign crude oil prices prompted RBI to lower FY26 inflation estimates to 3.7%, from 4%, while it retained the fiscal year growth forecast at 6.5%, as announced in April. “It is safe to say we have won the war on inflation,” Malhotra said. The rate-setting committee lowered the repo rate to the lowest in three years. All other policy rates stand revised accordingly. The central bank governor’s surprise gift of a higher-than-expected rate cut and liquidity booster follows a series of measures to ease monetary conditions so banks and non-banks step up lending. Since taking charge in December, he has now lowered the repo rate and cash reserve ratio (CRR) by 100 basis points each, besides easing guidelines such as those on the liquidity coverage ratio and risk weights on bank loans to finance companies.Hot propertyThe indices gained and yields on the benchmark paper fell to 6.14%, but later closed at 6.29%, after Malhotra announced a change in the policy stance. The rupee opened at 85.86 against dollar and strengthened to close at 85.62. “The policy is definitely positive for all sectors of the economy, particularly for banking and finance,’’ said CS Setty, chairman of State Bank of India. “In particular, the lower cost of borrowing will act as a counterbalance to any uncertainty.” The reduction in CRR to 3% will be in four stages — of 25 bps each between September and December.This would infuse an estimated Rs 2.5 lakh crore of liquidity into the banking system. On growth, RBI said it remains lower than ‘aspirations,’ given the challenging global environment. “Our aspiration is 8%. We would like to grow as fast as possible,” said Malhotra.The governor also hinted at a likely pause in the rate action after the outsized cut that surprised most market watchers. “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,” he said.'Action over mere intent' “We could have kept it accommodative and not done anything. Action is more important. Whatever we say should also translate into action. The accommodative stance was only an intent,” said the governor. He also said the transmission has been good after the previous two rate cuts. “We need to do it faster and that is why we have frontloaded some of our actions,” he said. Malhotra added that the move will certainly increase the flow of credit. “That is why this liquidity is important and reducing the repo rate is important.” On inflation, the RBI governor said, “Most projections point toward continued moderation in the prices of key commodities, including crude oil.... we need to remain watchful of weather-related uncertainties and still evolving tariff related concerns with their attendant impact on global commodity prices.”The minutes of the meeting of this policy review are expected to be published in about a fortnight. The next MPC review meeting is scheduled August 4-6.
One basis point is a hundredth of a percentage point. The rate cut is expected to immediately lower home loan rates for borrowers with floating rate loans, and borrowing costs for small entrepreneurs. At the same time, banks will start reducing deposit rates to protect margins.Easing food prices and benign crude oil prices prompted RBI to lower FY26 inflation estimates to 3.7%, from 4%, while it retained the fiscal year growth forecast at 6.5%, as announced in April. “It is safe to say we have won the war on inflation,” Malhotra said. The rate-setting committee lowered the repo rate to the lowest in three years. All other policy rates stand revised accordingly. The central bank governor’s surprise gift of a higher-than-expected rate cut and liquidity booster follows a series of measures to ease monetary conditions so banks and non-banks step up lending. Since taking charge in December, he has now lowered the repo rate and cash reserve ratio (CRR) by 100 basis points each, besides easing guidelines such as those on the liquidity coverage ratio and risk weights on bank loans to finance companies.Hot propertyThe indices gained and yields on the benchmark paper fell to 6.14%, but later closed at 6.29%, after Malhotra announced a change in the policy stance. The rupee opened at 85.86 against dollar and strengthened to close at 85.62. “The policy is definitely positive for all sectors of the economy, particularly for banking and finance,’’ said CS Setty, chairman of State Bank of India. “In particular, the lower cost of borrowing will act as a counterbalance to any uncertainty.” The reduction in CRR to 3% will be in four stages — of 25 bps each between September and December.This would infuse an estimated Rs 2.5 lakh crore of liquidity into the banking system. On growth, RBI said it remains lower than ‘aspirations,’ given the challenging global environment. “Our aspiration is 8%. We would like to grow as fast as possible,” said Malhotra.The governor also hinted at a likely pause in the rate action after the outsized cut that surprised most market watchers. “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,” he said.'Action over mere intent' “We could have kept it accommodative and not done anything. Action is more important. Whatever we say should also translate into action. The accommodative stance was only an intent,” said the governor. He also said the transmission has been good after the previous two rate cuts. “We need to do it faster and that is why we have frontloaded some of our actions,” he said. Malhotra added that the move will certainly increase the flow of credit. “That is why this liquidity is important and reducing the repo rate is important.” On inflation, the RBI governor said, “Most projections point toward continued moderation in the prices of key commodities, including crude oil.... we need to remain watchful of weather-related uncertainties and still evolving tariff related concerns with their attendant impact on global commodity prices.”The minutes of the meeting of this policy review are expected to be published in about a fortnight. The next MPC review meeting is scheduled August 4-6.
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