Surprise Monetary Policy! Repo Rate Cut By 50 Bps To 5.5%; Change Of Stance To Neutral; CRR Cut By 100 Bps

The Reserve Bank of India's Monetary Policy Committee, led by RBI Governor Sanjay Malhotra, cut the benchmark repo rate by 50 basis points for the third straight time. The first rate cut was in February this year, followed by another in April.

After having reduced the repo rate by 100 basis points, monetary policy is left with limited space to support growth, said RBI Governor Sanjay Malhotra, giving the rationale for changing the stance to neutral.

• Going forward, economic activity continues to maintain the momentum in 2025-26, supported by private consumption and traction in fixed capital formation.

• The sustained rural economic activity bodes well for rural demand, while continued expansion in services sector is expected to support the revival in urban demand.

• Investment activity is expected to improve in light of higher capacity utilization, improving balance sheets of financial and non-financial corporates, and government’s capital expenditure push. Trade policy uncertainty continues to weigh on merchandise exports prospects.

• On the supply side, agriculture prospects remain bright on the back of an above normal south-west monsoon forecast and resilient allied activities. Services sector is expected to maintain its momentum.

• However, spillovers emanating from protracted geopolitical tensions, and global trade and weather-related uncertainties pose downside risks to growth.

Taking all these factors into account, real GDP growth rate is projected at 6.5% as earlier, with Q1 FY26 GDP growth projected at 6.5%, Q2 at 6.7%, Q3 at 6.6%, Q4 at 6.3%. The risks are evenly balanced.

• Going forward, the likely above normal monsoon along with its early onset augurs well for Kharif crop prospects. Reflecting this, inflation expectations are showing a moderating trend, more so for the rural households. Most projections point towards continued moderation in the prices of key commodities, including crude oil.

• Notwithstanding these favourable prognoses, we need to remain watchful of weather-related uncertainties and still evolving tariff related concerns with their attendant impact on global commodity prices.

Taking all these factors into consideration, and assuming a normal monsoon, CPI inflation for FY26 is projected at 3.7% vs 4% estimated in April 2025, with Q1 at 2.9%, Q2 at 3.4%, Q3 at 3.9%, Q4 at 4.4%. The risks are evenly balanced.