Friday, 20 Jun, 2025
The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026.
According to the RBI Governor, the RBI and MPC will continue to use the flexibility built into the inflation targeting framework to improve macroeconomic outcomes in the economy's best interest while responding to the changing growth-inflation dynamics.
In a major move, the Reserve Bank of India's Monetary Policy Committee (MPC) on Friday cut the repo rate by 50 basis points, bringing it down to 5.5 percent. This marks the third consecutive rate cut in the current calendar year. Alongside, the MPC also changed its policy stance from 'accommodative' to 'neutral.' This latest reduction is the most aggressive since the emergency 75-basis-point cut implemented during the Covid-19 pandemic in March 2020. Announcing the decision, RBI Governor Sanjay Malhotra said it follows a thorough evaluation of prevailing macroeconomic conditions.
Following the repo rate cut, the Reserve Bank of India also revised other key policy rates. The Standing Deposit Facility (SDF) rate under the Liquidity Adjustment Facility (LAF) was lowered to 5.25 percent, while both the Marginal Standing Facility (MSF) rate and the Bank Rate were set at 5.75 percent. Prior to this, the central bank had implemented 25-basis-point cuts in both February and April.
Source: Reserve Bank of India
Since February 2025, the RBI has reduced the policy repo rate by a cumulative 100 basis points. This has prompted many banks to revise their lending rates tied to external benchmarks such as the repo-linked External Benchmark Lending Rates (EBLRs) and the Marginal Cost of Funds-Based Lending Rates (MCLR), effectively making credit more affordable for borrowers. A lower repo rate typically results in reduced EMIs for both retail and corporate loans.
The policy decision comes against the backdrop of easing inflation. As per data from the Ministry of Statistics and Programme Implementation, retail inflation declined to 3.16 percent in April from 3.34 percent in March, comfortably below the RBI’s 4 percent target. This downward trend in inflation has led to growing expectations of a more supportive monetary policy stance.
Source: Ministry of Statistics and Programme Implementation
On the growth front, India’s GDP expanded by 7.4 percent in the March quarter, the highest in the last four quarters, though overall growth for FY25 came in at 6.5 percent, slightly underperforming compared to previous years. Governor Sanjay Malhotra acknowledged ongoing global risks, including geopolitical uncertainties and evolving trade policies, but remained optimistic about India’s growth outlook, citing encouraging monsoon forecasts and continued strength in the services sector.
India’s economy is estimated to have grown by 7.4 percent in the March quarter and 6.5 percent over the full financial year 2024–25. According to a Mint report dated 30 May, these figures are notably lower than the 8.4 percent growth recorded in Q4 of FY24 and the revised 9.2 percent for the full FY24. In its April forecast, the Reserve Bank of India projected GDP growth for FY2025–26 at 6.5 percent, with quarterly estimates of 6.5 percent in Q1, 6.7 percent in Q2, 6.6 percent in Q3, and 6.3 percent in Q4.
In its latest statement, the Monetary Policy Committee (MPC) acknowledged that current growth levels fall short of expectations, citing persistent global headwinds and elevated uncertainty. It emphasized the need to bolster domestic demand, stating: “There is a pressing need to stimulate private consumption and investment through appropriate policy measures to strengthen the momentum of economic growth.”
The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was last increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.
