The Reserve Bank of India (RBI) delivered a larger-than-expected interest rate cut on Friday, citing easing inflation pressures and mounting risks to India’s economic outlook.
RBI Governor Sanjay Malhotra announced a shift in the central bank’s policy stance from ‘accommodative’ to ‘neutral’, attributing the change to rising global economic uncertainties. He also revised down the central bank’s consumer price index (CPI) inflation forecast for the current fiscal year.
The benchmark repo rate was cut by 50 basis points to 5.5%, exceeding market expectations for a 25 bps reduction. This marks the third rate cut of the year, following two earlier 25 bps cuts, bringing the total easing in 2025 to 100 basis points.
In addition, the cash reserve ratio (CRR)—the proportion of deposits banks must hold in reserve—was reduced by 100 basis points to 3%, in an effort to improve domestic liquidity conditions.
Speaking during a livestream, Malhotra emphasized that the RBI was front-loading monetary support in anticipation of persistent global headwinds.
The move follows a sharp decline in CPI inflation in March and April, bringing it well below the RBI’s 4% target. Malhotra stated that the new inflation outlook for fiscal 2026 is 3.7%, down from the previous 4% projection, while the GDP growth forecast remains unchanged at 6.5%.
Although markets had anticipated some easing, the larger-than-expected 50 bps cut signaled growing caution at the RBI over both inflation and growth risks.
Malhotra acknowledged that India’s economy had shown resilience, particularly with stronger-than-expected GDP growth in the March quarter, despite global pressures, including U.S. trade tariffs. However, he warned that risks to growth persist heading into the next quarter.
The unexpected size of the cut briefly shook Indian markets, with the rupee slipping slightly, while the Nifty 50 index recovered from earlier losses to trade modestly higher following the announcement.
