RBI Slashes Repo Rate by 50 bps to 5.50% to Boost Growth Amid Easing Inflation

The Reserve Bank of India (RBI) has reduced the key repo rate by 50 basis points to 5.50%, down from 6.00%, as part of its efforts to support economic growth. The Standing Deposit Facility rate has also been adjusted to 5.25%.

RBI Chief says the Marginal Standing Facility (MSF) rate is now set at 5.75%.

RBI has cut the Cash Reserve Ratio (CRR) by 100 basis points to 3%, giving a big boost to banks. RBI Governor Sanjay Malhotra said this cut will happen in four equal parts of 25 basis points each, starting from September 6 and continuing on October 4, November 1, and November 29. This move will release Rs 2.5 lakh crore into the banking system. Since January, RBI has already added Rs 9.5 lakh crore of durable liquidity to support the economy.

RBI Governor highlighted that while the global economic backdrop remains fragile, uncertainty around the global outlook has eased. He noted that growth-inflation trade-offs are becoming more complex across the world.

Despite global challenges, India’s economy remains strong, stable, and full of opportunities for both domestic and foreign investors. The country continues to show resilience, with stability in prices, the financial system, and the political landscape. Inflation has eased significantly over the last six months, with broad-based moderation across sectors. The central bank expects inflation to remain low, with CPI inflation for FY26 revised down to 3.7% from 4% earlier. Core inflation is also expected to stay under control.

However, growth remains below desired levels. The RBI believes it is important to stimulate economic activity, especially as the recovery in industrial output has been uneven. This led to the decision to front-load rate cuts to boost growth. Overall, the medium-term outlook for inflation is stable, and the RBI remains focused on supporting a stronger, faster-growing economy.

RBI Chief stated that monetary policy now has limited room to further support growth. The Monetary Policy Committee (MPC) has shifted its stance to neutral. Despite some unevenness, domestic economic activity remains resilient, with industrial activity slowly improving and investment activity showing signs of revival. Inflation expectations are gradually easing, while private consumption stays strong, supported by steady rural demand.

The services sector continues to perform well, with strong export growth expected to boost urban consumption further. The agricultural outlook is also positive, helped by the forecast of above-average monsoon rainfall. However, uncertainty in global trade is weighing on merchandise exports, and ongoing geopolitical tensions and weather-related risks could negatively impact growth in the future.

The RBI Chief emphasized the need to stay cautious about weather uncertainties and the impact of tariffs on global commodity prices. Inflation is expected to remain stable with affordable prices across sectors. A good monsoon is likely to support a strong kharif crop.

The current account deficit for 2024-25 is expected to stay low and within sustainable limits. Net services and remittance inflows are expected to continue in surplus. Despite a slowdown in foreign direct investment inflows, India remains an attractive destination for investors.

RBI Chief said they are confident about meeting the country’s external financial needs and will keep providing enough liquidity to banks. The Cash Reserve Ratio (CRR) will be cut in four equal steps, releasing Rs 2.5 trillion to lower banks’ funding costs and speed up rate cut effects. The weighted average call rate remains the key monetary policy target. Though the impact of rate cuts on credit markets is not yet clear, RBI will keep monitoring the situation and take action as needed. The external sector remains strong and resilient.

RBI Chief stated that the real GDP growth forecast for FY26 is unchanged at 6.5%. Growth is expected at 6.5% in Q1 and 6.7% in Q2 of FY26.

RBI Chief expects CPI inflation to be 2.9% in Q1 and 3.4% in Q2.

Following the RBI’s shift to a neutral policy stance, Indian bond yields reversed most of their earlier decline. The 10-year benchmark government bond yield is now at 6.1992%, compared to the day’s low of 6.1059% and 6.2019% before the policy announcement.

India’s 5-year government bond yield fell by up to 17 basis points to 5.6739%.

RBI Chief Malhotra’s Press Briefing – Key Highlights

RBI Governor Malhotra said liquidity in the banking system is currently abundant, and the RBI will monitor how the situation and call rates evolve. On the foreign exchange front, he emphasized that the RBI does not aim for any specific currency level, only intervening during unusual volatility. He added that forex reserves are strong, and there’s no major concern about forward FX positions.

He stated inflation is now under control, and the RBI has effectively won that battle. To provide certainty in a time of global uncertainty, the central bank chose to cut rates earlier than usual. The advance CRR cut aims to give banks more clarity and stability.

Malhotra clarified that all future rate decisions will depend on data, and with a neutral policy stance, rates could move in either direction. The entire Monetary Policy Committee (MPC) agreed on this stance.

He acknowledged that while monetary transmission could be faster, it’s still working well. Based on past experience, a 4% CRR isn’t necessary right now—3% is sufficient. The RBI believes this will help improve credit flow and support lending. Their target remains economic growth of 7–8%.

Lastly, Malhotra said the RBI will actively consult stakeholders before issuing any regulation. He noted some lenders weren’t following gold loan rules properly due to a lack of clarity. Final guidelines for gold loans will be released by Monday.

ING Group believes the RBI’s recent move signals a likely pause in further policy changes for now, though it hasn’t ruled out the possibility of future rate cuts if there is a significant slowdown in growth or a drop in inflation.