RBI Stuns Markets with Aggressive 50 bps Rate Cut, Shifts Stance to Neutral

June 6, 2025 | Mumbai

            In a dramatic departure from expectations, the Reserve Bank of India (RBI) slashed the repo rate by 50 basis points (bps) to 5.50% – its lowest level since 2010 – and pivoted to a ‘neutral’ monetary policy stance at the conclusion of its June Monetary Policy Committee (MPC) meeting today. The move sent shockwaves through financial markets, which had widely anticipated a modest 25 bps reduction.

Breaking Down the Decision

The MPC’s 6-member panel unanimously voted for the deeper cut, citing:

• Plummeting Inflation: April’s retail inflation hit 3.16%, nearing Union Bank of India’s projection of a 6-year low of 3%.
• Global Growth Concerns: Escalating trade wars and sluggish demand in key export markets (EU, China).
• Domestic Liquidity Crunch: Persistent tightness in banking system liquidity despite previous cuts.
• Growth Imperative: Q4 FY25 GDP growth slowed to 6.1% (from 6.8% in Q3), signaling need for stimulus.

           Governor Sanjay Malhotra declared, “The sharp disinflationary trend, stable fiscal outlook, and subdued private investment necessitated decisive action. Our shift to neutral provides flexibility to respond to evolving data.”

 

Why 50 bps When 25 bps Was Expected?

Market analysts identified five critical drivers:

1.     Inflation Collapse: Food inflation (-1.2% YoY in April) and core inflation (3.8%) fell below RBI’s 4% target.

2.    Real Rates Trap: With inflation at 3.16%, the pre-cut real repo rate (6.0% - 3.16% = 2.84%) was among Asia’s highest, hurting competitiveness.

3.    Fiscal Credibility: The government’s commitment to a 4.5% FY26 fiscal deficit reassured RBI on inflation control.

4.    Global Central Bank Easing: Recent rate cuts by ECB, Bank of England, and PBOC created policy space.

5.    Transmission Urgency: Previous 25 bps cuts (Feb & Apr 2025) saw only 10-15 bps passed to borrowers.

 

Sectoral Impact: Winners and Watchouts

Sector	Impact	Outlook
Banking	Margin pressure short-term; lower borrowing costs boost credit demand.	Positive (Retail loans)
Real Estate	Home loans to drop 30-40 bps; affordable housing demand surges.	Strong Buy
Automobiles	Cheaper auto loans revive sluggish sales; inventory correction expected.	Cautiously Positive
MSMEs	Working capital costs fall 0.8-1.0%; capex cycle revival likely.	Transformative
Exporters	Rupee depreciation (0.8% post-announcement) boosts competitiveness.	Neutral (Global demand key)

 

Expert Reactions: “Bold, But Risky”

• Radhika Rao (DBS Bank): *“RBI front-loaded cuts knowing inflation may rebound to 4.5% by Q4. Neutral stance signals pause unless growth falters.”*
• Aurodeep Nandi (Nomura): “Overkill? Core inflation remains sticky. Risks fuelling asset bubbles if transmission is asymmetric.”
• CII President: *“Game-changer for industry! Cuts project financing costs by 75 bps, enables ₹1.2 lakh crore new investments.”*

 

The Road Ahead: What ‘Neutral’ Really Means

The shift from ‘accommodative’ to ‘neutral’ is critical:

• No guaranteed future cuts: August’s MPC (scheduled for Aug 5-7) will depend on July inflation, monsoon progress, and Fed actions.
• Focus shifts to liquidity: RBI may deploy OMOs or CRR cuts to ensure rate cuts reach borrowers.
• Inflation guardrails remain: RBI retained FY26 inflation projection at 4.2%, signaling vigilance.

 

Historical Context: RBI’s Rate-Cut Trajectory

*Repo Rate Evolution (2024-2025):*

Meeting	Rate Change	New Repo Rate	Stance
April 2024	+25 bps	6.75%	Withdrawal
June 2024	Hold	6.75%	Hawkish
August 2024	Hold	6.75%	Hawkish
October 2024	-25 bps	6.50%	Accommodative
December 2024	Hold	6.50%	Accommodative
February 2025	-25 bps	6.25%	Accommodative
April 2025	-25 bps	6.00%	Accommodative
June 2025	-50 bps	5.50%	Neutral

*This marks the largest single cut since the COVID-era 75 bps reduction in March 2020.*

 

• Home Loans: EMIs on ₹50-lakh loans to drop by ₹1,650/month.
• Savings Rates: FD rates may slide 25-50 bps; shift to debt mutual funds advised.
• Business Loans: MSME lending rates could hit 10.25-10.75% (down from 11.5%).

 

Looking Ahead: Key Triggers to Watch

1.     Monsoon Progress: A 10% rainfall deficit could spike food inflation by September.

2.    Fed Policy: US rate cuts (expected Sept 2025) would give RBI more room.

3.    Oil Prices: Brent crude above $90/bbl may force RBI to hold rates.

Governor Malhotra’s parting message: “This is not a cycle trigger, but a recalibration. Growth must rise with stability.”

Next MPC Meeting: August 5-7, 2025

         Today’s move signals RBI’s conviction in India’s disinflation path. While markets cheer, the real test lies in transmission to high-street lending rates. With banks sitting on ₹2.3 lakh crore excess SLR holdings, the ball is now in their court to fuel growth.

 

Data Sources: RBI, MOSPI, CMIE, Bloomberg