The 50 bps Excision as Central‐Banker Antidote or Systemic Toxin?
RBI Slashes Repo Rate by 50 bps to 5.5%, Announces 100 bps CRR Cut to Infuse ₹2.5 Lakh Crore Liquidity
In a significant step toward supporting economic growth and ensuring sufficient liquidity in the financial system, the Reserve Bank of India (RBI) has announced a 50 basis points (bps) cut in the policy repo rate, bringing it down to 5.5%. Simultaneously, it has unveiled a 100 bps reduction in the Cash Reserve Ratio (CRR), to be implemented in four tranches throughout the second half of 2025.
The announcement was made by RBI Governor Sanjay Malhotra during the post-MPC press briefing on Friday, marking a shift in the central bank's monetary stance from ‘Accommodative’ to ‘Neutral’. The twin measures aim to spur credit growth, revive investment, and bolster India’s GDP trajectory, especially in the backdrop of easing inflation.
Monetary Policy Shift Backed by Cooling Inflation
The decision to reduce the repo rate comes at a time when inflation has shown consistent signs of moderation. The Consumer Price Index (CPI) for April 2025 eased to 3.16%, comfortably within the RBI’s medium-term target band of 2% to 4%.
This inflation trajectory has given the central bank the leeway to stimulate demand without the risk of stoking inflationary pressures. Governor Malhotra emphasized that the rate cut aligns with the broader objective of “sustaining growth, ensuring liquidity, and maintaining macroeconomic stability.”
CRR Cut to Inject ₹2.5 Lakh Crore Into the Banking System
In a parallel move aimed at improving liquidity, the RBI announced a phased reduction of the CRR—the portion of deposits banks are required to hold with the RBI—by 100 basis points. The cut will be implemented in four tranches of 25 bps each, on the following dates:
- September 6, 2025
- October 4, 2025
- November 1, 2025
- November 29, 2025
This reduction is expected to release approximately ₹2.5 lakh crore into the banking system over the next few months. The additional liquidity will enable banks to increase lending, lower borrowing costs, and support sectors such as infrastructure, MSMEs, and housing.
GDP Growth Forecasts Remain Strong
Despite global economic headwinds, the Indian economy has shown remarkable resilience. The RBI has retained its real GDP growth forecast for FY 2025-26 at 6.5%, with quarterly projections as follows:
- Q1: 6.5%
- Q2: 6.7%
- Q3: 6.6%
- Q4: 6.4%
India’s economy grew by an impressive 7.4% in the January–March 2025 quarter, driven primarily by strong performance in construction, manufacturing, and capital goods. The RBI believes that recent policy moves will help maintain this momentum while encouraging fresh investments and consumer spending.
Inflation Outlook for FY 2025–26
The inflation outlook has been revised slightly upward for the latter part of the fiscal year, though it remains within the RBI’s comfort range:
- Q1: 2.9%
- Q2: 3.4%
- Q3: 3.9%
- Q4: 4.4%
While the inflation trend indicates a gradual rise, it is expected to remain well-anchored. The RBI will continue to monitor both domestic and global factors that could influence commodity prices and supply chains.
Market Reaction & Outlook
Markets responded positively to the announcement, with bond yields easing and equity markets registering mild gains. Analysts see the policy shift as a timely and balanced move that reflects the central bank’s commitment to reviving growth without compromising inflation discipline.
Economists expect banks to pass on the rate cuts to borrowers, leading to lower EMIs for home, auto, and personal loans, and improved business sentiment across sectors.
Conclusion
The RBI’s dual decision to reduce the repo rate and lower the CRR marks a strategic pivot toward growth support in a low-inflation environment. By injecting fresh liquidity and lowering the cost of capital, the central bank has laid the groundwork for a more robust recovery in FY 2025–26.
As always, future policy action will remain data-dependent, with the RBI closely watching inflation trends, fiscal developments, and global macroeconomic conditions.
