India focuses on growth with larger-than-expected 50 bps cut in key rate; slashes reserve ratio

MUMBAI: The Reserve Bank of India (RBI) cut its key repo rate by a larger-than-expected 50 basis points on Friday, a third consecutive reduction, and slashed the reserve ratio for banks as muted inflation provided space for policymakers to focus on supporting economic growth.

The Monetary Policy Committee (MPC), which consists of three RBI officials and three external members, cut the repo rate to 5.50%. It has now cut rates by 100 basis points in 2025, starting with a quarter-point reduction in February, its first cut since May 2020.

It made a similar-sized cut in April.

The RBI also cut the cash reserve ratio by 100 basis points to 3%, adding to already surplus liquidity.

India’s benchmark 10-year bond yield was down 2 basis points at 6.18%, after dropping 10 basis points earlier, while the rupee was little changed at 85.82, after dropping as much as 0.2%.

The benchmark equity indexes also turned lower after advancing in the wake of the decision and were down around 0.1% each.

The monetary policy stance was changed from accommodative to neutral.

Explaining Friday’s cut, RBI Governor Sanjay Malhotra said inflation had softened significantly, giving space for continuing policy easing and front loading of rate cuts. The central bank has a 4% inflation target.

Weakening inflation gives space for continuing policy easing and front loading of rate cuts, Malhotra added.

Retail inflation has slowed more quickly than expected in recent months and dropped to a near 6-year low of 3.16% in April, sharply below the RBI’s medium-term target of 4%.

The central bank now expects inflation to average 3.7% in the current financial year, lower than its previous projection of 4%.

India central bank may deliver third straight rate cut as inflation undershoots

India’s economy has been resilient, with GDP growth surging to 7.4% in the January-March quarter.

India is already growing at a fast pace but aspires to grow at a higher pace, Malhotra said.

For the current financial year, GDP growth is projected at 6.5% by the central bank, unchanged from its previous forecast.