'RBI’s stance was changed to ‘neutral’ from ‘accommodative’, signalling that there remains limited room for future rate cuts.'
The Reserve Bank of India’s (RBI) Monetary Policy Committee’s (MPC) decision to cut the repo rate by 50 basis points (bps) to 5.5 per cent was contrary to the expectations of many economists.
Firstly, most of the economists expected the MPC to cut the repo rate by 25 bps citing the weakening of inflation, prospects of economic growth, geopolitical uncertainty and comfortable system liquidity.
It was also expected the MPC’s decision would be unanimous.
On the other hand the six member MPC went the whole hog of slashing the repo rate – the rate at which the RBI lends to the banks- by 50 bps.
However the decision was not unanimous as Saugata Bhattacharya voted for a 25 bps cut in repo rate while other MPC members - Nagesh Kumar, Ram Singh, Rajiv Ranjan, Poonam Gupta and Sanjay Malhotra, RBI Governor, voted in favour of 50 bps cut.
"The RBI’s stance was changed to ‘neutral’ from ‘accommodative’, signalling that there remains limited room for future rate cuts,” said Sonal Badhan, Economist at the Bank of Baroda.
According to Badhan, if the economic growth rate falls substantially from the 6.5 per cent forecast, then the repo rate may see further reduction.
The 100 bps reduction in the cash reserve ratio (CRR) for banks will help in the speedier transmission of the rate cuts which in turn would help in credit and gross domestic product (GDP) growth, Badhan added.
Rajani Sinha, Chief Economist, CARE Ratings said, the CRR reduction is expected to inject approximately Rs 2.5 trillion in durable liquidity into the system.
This measure should bolster credit growth and further facilitate smoother transmission of the policy rate cuts, thereby supporting overall economic growth.
The RBI’s decision to keep growth projections unchanged for FY26 at 6.5 per cent was on expected lines, said Sinha and added that CARE Ratings forecast however remains slightly more conservative, projecting FY26 growth at 6.2 per cent amidst global headwinds and policy uncertainties.
Though RBI has projected inflation at 3.7 per cent for FY26, Sinha said, CARE Ratings continue to maintain a higher estimate of 4 per cent considering weather-related risks.
There are already early reports of crop damages in parts of south India from early monsoon this year which can add to the CPI inflation in coming months.
Looking ahead, we do not anticipate any further rate cuts from the RBI unless downside risks to growth materialise, Sinha remarked.
RBI also lowered its inflation projection for FY26 downward to 3.7 per cent from 4 per cent estimated in Apr '25.
This is on account of significant moderation in food prices.
This also augurs well for domestic consumption.
On the other hand, Indranil Pan, Chief Economist, YES Bank is of the view that the RBI-MPC can cut the repo rate by another 25 bps but the timing of the same remains uncertain.
Meanwhile experts are also of the view that the monetary easing will boost up the stock markets.
Devarsh Vakil, head of Prime Research at HDFC Securities said the monetary easing by RBI-MPC will provide a much needed push for the Indian markets to move out of the current trading range beyond Nifty 25,000 level and head towards previous high 26,200.
Aamar Deo Singh, senior vice president – Research at Angel One said, “If earnings momentum picks up and global sentiment stabilises Nifty can cross the 26,000 mark and have an outside chance to reach 27,000 as well.”
Tribhuwan Adhikari, MD & CEO of LIC Housing Finance said: “This move by the RBI will likely catalyse a surge in home loan demand, especially the affordable housing segment.
"We expect a good boost in the housing demand July onward, and are optimistic that this year will be good for the housing finance industry.”
Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com
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