On June 6th, the Reserve Bank of India (RBI) cut its repo rate by 50 basis points to 5.5%. This marks the third consecutive rate cut by the country’s central bank since February 2025. The decision was driven by the need to stimulate domestic consumption and investment amid lower – than – expected economic growth and increasing global uncertainties.
Reasons for the Rate Cut
Sanjay Malhotra, the governor of the RBI, explained that the rate cut was necessary to accelerate the momentum of economic growth. The Economic Times of India noted that this decision comes at a time when inflation in the country is steadily declining. The RBI’s inflation expectation for the year has been lowered from 4% to 3.7%. Additionally, India’s overall inflation rate dropped to 3.2% in April, the lowest in nearly six years and significantly below the central bank’s medium – term target of 4%.
Factors Influencing Inflation
The RBI’s statement highlighted several factors contributing to the decline in inflation:
Early Monsoon Season: The early arrival of the monsoon season in India will ensure an adequate supply of major food crops.
Weakening Commodity Prices: The decline in food prices, along with the weakening of commodity prices such as oil, has contributed to the lower inflation rate.
Currency Strengthening: The strengthening of the Indian currency has also helped contain inflation.
Policy Stance and Future Outlook
The RBI stated that under the current circumstances, the space for supporting economic growth through monetary policy is “limited.” As a result, the central bank has changed its monetary policy stance from “accommodative” to “neutral.” This shift indicates that further rate cuts will depend on the dynamic balance between India’s economic growth and inflation.
Cumulative Rate Cuts in 2025
The RBI has previously cut the repo rate by 25 basis points in February and April 2025. Since the beginning of the year, the central bank has cumulatively cut interest rates by 100 basis points.
Conclusion
The Reserve Bank of India’s decision to cut interest rates by 50 basis points reflects its efforts to stimulate domestic consumption and investment in the face of lower – than – expected economic growth and increasing global uncertainties. The declining inflation rate and favorable agricultural and commodity market conditions have provided the RBI with the room to make this significant rate cut. The shift to a neutral policy stance suggests that future rate cuts will be contingent on the interplay between economic growth and inflation dynamics.
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