The RBI justifiably prioritized fostering economic growth for sustained economic development, particularly because of controlled inflation and fiscal space. The effectiveness of these measures will depend on their timely implementation and the responsiveness of the banking sector to the policy changes.
The June 2025 policy review, which took place during a time of considerable uncertainty for the global economy, surpassed expectations by lowering the Repo rate by 50 basis points, bringing it down to 5.5%, i.e., a total decrease of 100 basis points since February 2025. This marked the largest rate cut in five years, showcasing the RBI’s proactive approach to stimulate economic growth amid global uncertainties and inflation trends. The Standing Deposit Facility (SDF) Rate has been adjusted to 5.25%. The Marginal Standing Facility (MSF) Rate and Bank Rate have been established at 5.75%.
Further, the cash reserve ratio (CRR) was reduced by 100 basis points from 4% to 3% in a staggered manner, implemented in four equal tranches of 25 basis points each, in the fortnights beginning September 6, October 4, November 1, and November 29 to provide durable liquidity. The cut in CRR is expected to release primary liquidity of about Rs 2.5 lakh crore into the banking system by the end of November 2025, thereby lowering borrowing costs and encouraging credit flow to productive sectors.
Global Economic Environment
The global economic environment is fraught with challenges, including geopolitical tensions and protectionist trade policies. These factors have contributed to a slowing of global growth projections. The International Monetary Fund (IMF) has forecasted a growth rate of 3.2% for the global economy in 2025, with a slight increase expected in 2026. The global economy is resilient despite these geopolitical tensions and supply chain disruptions. However, risks to the outlook persist, including potential shifts in trade policy and fluctuating commodity prices. Major economies have seen a moderation in inflation rates, although core inflation remains persistent in some cases.
The US Federal Reserve’s monetary policy stance will be crucial in shaping global liquidity conditions. Given the Fed’s cautious approach to rate cuts, global financial markets are likely to remain volatile.
There are also issues of the unpredictability inherent in the US’s pause on punitive tariffs for 90 days, China’s tech independence drive, fears of a fragmented global semiconductor ecosystem, artificial intelligence (AI) geopolitics and strategic alignments, currency dynamics and macro sensitivities, political transition and economic reform, emerging market growth challenges, energy markets and production strategy. Emerging markets, including India, will need to navigate these challenges adroitly while maintaining macroeconomic stability.
Domestic Economy
Domestically, India’s GDP growth slowed to 6.5% in FY25, the lowest in four years, primarily due to subdued private consumption and investment. Despite heightened global uncertainties, the economy demonstrated resilience in Q4 with a growth rate of 7.4%, driven by strong domestic demand and government spending.
India’s economy showed strong growth momentum, with the IMF estimating a growth rate of 7% for 2025-26. The services sector has been a key driver, bolstered by robust domestic demand, favourable government policies, and a normal monsoon. The Index of Industrial Production (IIP) growth has also displayed an upward trend, fuelled by the manufacturing and electricity sectors.
However, the agricultural sector faces challenges due to uneven monsoon rainfall and pest infestations. The onset of the monsoon is positive, but global uncertainty persists, with “Growth-inflation trade-off becoming more challenging.” Financial stability remains a significant challenge amidst global spillovers and the technological challenges posed by AI and other innovations.
The RBI’s FY26 GDP growth forecast remains at 6.5 %, with quarterly growth rates expected to be 6.5% in Q1, 6.7% in Q2, 6.6% in Q3, and 6.3% in Q4. The risks are evenly balanced.
Given the challenging growth outlook stemming from geopolitical tensions, global trade disruptions, and weather-related uncertainties, the rate cut will help to maintain the growth momentum.
Inflation Dynamics and Policy Response
Inflationary pressures have eased significantly, with the Consumer Price Index (CPI) falling to 2.82% in May 2025, marking the lowest level in over six years. This decline is attributed to a reduction in food prices, particularly vegetables, and a favorable base effect. Core inflation remains slightly above the RBI’s target, but the overall inflation trajectory provides the RBI the flexibility to implement accommodative monetary policies.
Inflation is expected to remain range-bound, provided food prices stabilize and global oil prices do not rise. The RBI will need to closely monitor the impact of the macroeconomic factors on food inflation and rural demand. The CPI inflation has remained within the RBI’s target band of 4% +/- 2%, although food price pressures persist.
CPI inflation is projected to remain around 4.5% for 2025-26, with risks tilted towards food inflation. The RBI’s inflation projections will be crucial in determining the policy stance. Given the uncertainty surrounding global commodity prices and domestic food supply, the RBI may adopt a cautious approach to inflation targeting.
The outlook for food inflation is soft, and the core inflation outlook remains benign. Given benign inflation because of easing food and core inflation trends, the inflation forecast for FY 26 has been revised downward from 4% to 3.7%.
Fiscal Policy and Monetary Policy Synergies
The RBI’s policy decisions must be in sync with the government’s fiscal policy objectives. Given the government’s focus on infrastructure spending and social welfare programs, the RBI’s monetary policy stance is crucial in supporting these initiatives. A dovish stance on interest rates could support growth, but would need to be balanced against inflation risks.
Changed Stance
In April 2025, the MPC switched to an ‘accommodative’ stance from ‘neutral’. But the RBI again changed its stance from ‘accommodative’ to ‘neutral’, indicating a more balanced approach to managing economic growth and inflation. This shift suggests that further easing or tightening will be data-driven and evidence-based.
Policy Impact and Implications
The rate cut and CRR reduction will inject liquidity into the banking system, reviving private capex, enhancing credit, supporting MSMEs, boosting consumption, and accelerating GDP growth. The RBI expects faster rate transmission, which would benefit borrowers with floating-rate loans.
The rate cuts are expected to revive private capex, support MSMEs, boost consumption, and accelerate GDP growth in FY26.
Sectorally, the policy adjustments will positively impact various sectors. For instance, the reduction in the repo rate is likely to reduce equated monthly instalments (EMIs) on home loans, particularly the low and mid-value housing segments. This will boost demand in the real estate sector with significant multiplier effects. Similarly, easing credit conditions will stimulate investment in infrastructure and manufacturing.
There is limited policy space for further rate cuts, and we are close to the end of the rate-cutting cycle.
Conclusion
Given the domestic growth momentum and inflation dynamics, the RBI justifiably prioritized fostering economic growth for sustained economic development, particularly because of controlled inflation and fiscal space. The effectiveness of these measures will depend on their timely implementation and the responsiveness of the banking sector to the policy changes.
The RBI’s welcome measures of slashing both the repo rate and CRR were reflected in a sharp turnaround after a flat start in the Indian stock market, with both the Sensex and the Nifty rising well. The front-loaded easing cycle will improve credit growth, reduce credit pricing, and a corresponding drop in all external benchmark lending rates (EBLR), with EMIs on home and personal loans decreasing. However, pensioners and depositors will be hit by reduced interest on deposits.
The FY 26 is expected to witness sustained growth momentum, driven by domestic demand and favourable government policies. However, the RBI must remain vigilant regarding inflation risks and ensure that monetary policy supports growth while maintaining price stability. With a stable macroeconomic environment, India’s growth prospects are likely to remain bright.
ABOUT THE AUTHOR
Dr. Manoranjan Sharma is Chief Economist, Infomerics, India. With a brilliant academic record, he has over 250 publications and six books. His views have been cited in the Associated Press, New York; Dow Jones, New York; International Herald Tribune, New York; Wall Street Journal, New York.
