RBI’s 50 Basis Point Rate Cut: A Bold Move to Stimulate Growth Amidst Global Uncertainties
In a significant and unexpected move, the Reserve Bank of India (RBI) announced a 50 basis point cut in the repo rate on June 6, 2025, bringing it down to 5.5%. This decision, the third rate cut this year, underscores the central bank’s commitment to reviving economic growth amidst global uncertainties and domestic challenges.
Key Highlights of the RBI’s Monetary Policy Decision
- Repo Rate Reduction: The RBI reduced the repo rate by 50 basis points to 5.5%, exceeding market expectations of a 25 basis point cut.
- Policy Stance Shift: The Monetary Policy Committee (MPC) shifted its stance from “accommodative” to “neutral,” indicating a balanced approach towards future rate decisions.
- Inflation Outlook: The RBI projects retail inflation (CPI) to be 4.2% for FY26, down from 4.8% in FY25, assuming a normal monsoon and stable food prices.
- GDP Growth Forecast: The central bank has pegged India’s GDP growth at 6.7% for FY26, reflecting optimism about economic recovery.
Rationale Behind the Rate Cut
The RBI’s decision comes in the backdrop of easing inflationary pressures and concerns over slowing economic growth due to global uncertainties. Governor Sanjay Malhotra emphasized the need to support domestic demand and investment, especially in the wake of subdued global trade and financial market volatility.
The central bank also acknowledged the positive impact of the recent Union Budget, which provided tax relief and increased capital expenditure, thereby creating a conducive environment for growth.
Impact on Borrowers and the Economy
The immediate effect of the rate cut is a reduction in lending rates, leading to lower EMIs for borrowers. This move is expected to boost consumer spending and stimulate demand in sectors like housing, automobiles, and consumer durables.
For the broader economy, the rate cut aims to enhance liquidity, encourage investment, and support the ongoing recovery in industrial activity. The RBI’s projections suggest that the recovery in industrial activity and healthy rabi prospects should support growth in the fiscal year 2025-26.
Market Reaction
The financial markets responded positively to the RBI’s announcement. The Nifty 50 index edged up by 0.03% to 24,753.45, and the BSE Sensex held steady at 81,389.48 by mid-morning trading. Prior to the central bank’s announcement, both indices were down roughly 0.2%. Broad market indices, particularly the more domestically oriented smallcap and midcap stocks, each rose approximately 0.4%. Furthermore, 12 out of the 13 major industry sectors saw gains, reflecting a generally positive investor sentiment following the rate cut.
Looking Ahead
While the rate cut provides immediate relief and is a step towards stimulating growth, the RBI has indicated limited room for further monetary easing. Governor Malhotra cautioned that the central bank now has limited room to further support economic growth, signaling a more cautious approach moving forward.
The shift to a “neutral” policy stance suggests that future rate decisions will be data-dependent, taking into account evolving inflation dynamics and global economic conditions.
Conclusion
The RBI’s bold decision to cut the repo rate by 50 basis points reflects its proactive approach to support economic growth amidst global uncertainties. While the move brings immediate benefits to borrowers and aims to stimulate demand, the central bank remains cautious about future policy actions, emphasizing the need to balance growth and inflation objectives.
As the economy navigates through these challenging times, the RBI’s policy decisions will continue to play a crucial role in shaping India’s economic trajectory.
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The market continues to show resilience. Traders should maintain a cautiously bullish outlook. Sector rotation is playing a major role, and volatility may increase toward F&O expiry. Focus on technically sound breakouts and avoid chasing extended rallies.
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