The RBI’s six-member rate-setting panel on Friday fired a policy bazooka, front-loading a 50 basis points (bps) repo rate cut even as the central bank slashed the cash reserve ratio (CRR) by 100 bps to propel growth to a higher aspirational trajectory of 8 per cent.
The sharp and surprise reduction in the repo rate as well as CRR is expected to support domestic growth, which faces downside risks due to possibility of spillovers emanating from protracted geopolitical tensions, global trade and weather-related uncertainties, amid benign inflation. This may also quicken the pace of monetary policy transmission into lending and deposit rates.
The monetary policy committee (MPC) decided by a 5-1 majority to cut the policy repo rate (the interest rate at which banks borrow funds from RBI to overcome short-term mismatches) from 6 per cent to 5.50 per cent. It unanimously recommended a change in the monetary policy stance from “accommodative” to “neutral”.
Stock markets cheered the double bonanza with benchmark indices rallying over 1 per cent led by rate-sensitive sectors such as realty, financials, autos and consumer durables.
Imperative to support growth
Governor Sanjay Malhotra noted that growth, which was at 6.5 per cent in FY25, remains lower than the aspirational trajectory amidst challenging global environment and heightened uncertainty. He underscored that price stability is a necessary condition, but not sufficient to ensure growth.
Thus, it is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum.
“This changed growth-inflation dynamics calls for not only continuing with the policy easing but also frontloading the rate cuts to support growth,” he said.
Limited space to support growth
Malhotra emphasised that after having reduced the policy repo rate by 100 bps in quick succession since February 2025, under the current circumstances, monetary policy is left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral.
“From here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance. The fast-changing global economic situation, too necessitates continuous monitoring and assessment of the evolving macroeconomic outlook,” he said.
The surprise 50 bps repo rate cut, which is more than the widely anticipated 25 bps cut, coupled with the change in stance to “neutral” implies that the MPC will maintain status on the rate front for the next 2-3 meetings, allowing monetary transmission to take place fully into lending and deposit rates.
Inflation forecast lowered
The RBI revised the inflation forecast for FY26 downwards from the earlier forecast of 4 per cent to 3.7 per cent even as it kept the GDP growth projection unchanged at 6.50 per cent.
The Governor observed that the near-term and medium-term outlook now gives MPC the confidence of not only a durable alignment of headline inflation with the target of 4 per cent, as exuded in the last meeting but also the belief that during the year, it is likely to undershoot the target at the margin.
The 50 bps repo rate is the steepest after the March 27, 2020, cut of 65 bps (from 5.15 per cent to 4.40 per cent). The MPC has taken a U-turn on its monetary policy stance, which was changed from “neutral” to “accommodative” in its April 2025 meeting.
The RBI had last effected a 100 bps cut in CRR (the portion of deposits banks have to maintain with the RBI) by 100 bps from 4 per cent to 3 per cent on March 27, 2020.
The latest CRR cut, which will be spread over four equal tranches of 25 bps each with effect from the fortnight beginning September 6, is expected to release primary liquidity amounting to ₹2.50 lakh crore. The Governor emphasised that this cut, besides providing durable liquidity, will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market.
“A supportive policy environment is vital. This is even more important during periods of high uncertainty, such as the current times. At the Reserve Bank, therefore, while price stability remains the focus of monetary policy, we are not oblivious to putting in place complementary monetary and credit policies and regulations that support growth and prosperity.
UBS Economists opined that taking the RBI’s neutral policy rate assumption of 1.4t-1.9 per cent and their inflation estimate of 3.7% for FY26, the implied nominal repo rate could range between 5.1-5.6 per cent.
“We believe our baseline forecast of 5.5 per cent terminal repo rate has been met. However, considering still elevated global uncertainty, we think RBI has kept a buffer of another 25-50bps rate cut in case growth surprises lower,” they said.
Meanwhile, on small-value gold loans up to ₹2.50 lakh per borrower, Malhotra said the loan-to-value (LTV) ratio will be 85 per cent, including principal and interest. Currently, the LTV is 75 per cent.