More Stories

Informist, Friday, Jun. 6, 2025

 

By Shubham Rana

 

MUMBAI – Reserve Bank of India Governor Sanjay Malhotra Friday surprised almost everyone by effectively emptying the central bank's policy arsenal, front-loading interest rate cuts and providing a massive liquidity boost, all in the hope that growth will accelerate to a much higher level than projected at present.

 

While detailing the outcome of the Monetary Policy Committee's meeting on Friday, Malhotra dished out one surprise after another – the repo rate cut was higher than most projections, the stance was changed unexpectedly, and the cash reserve ratio was lowered to a level previously seen only during the pandemic. All this sent markets into a tizzy.

 

When Malhotra announced the repo rate was being cut by a higher-than-anticipated 50 basis points to 5.50%, the 10-year gilt yield almost immediately fell 10 bps. Then Malhotra said the policy stance was changed to neutral from accommodative, after which the 10-year gilt yield jumped 10 bps to 6.20%, all within a span of just a few minutes.

 

Yields fell again, albeit by a lower extent, when Malhotra announced the cash reserve ratio was being cut by 100 bps to 3.00% in four tranches starting September. The 10-year yield ended the day at 6.24%, only slightly higher than 6.20% on Thursday.

 

No one had anticipated this. While a few economists had mentioned the possibility of a 50-bps repo rate cut, no one saw the stance change and CRR cut coming. Notably, this was second-biggest interest rate cut in India since the MPC was first constituted in 2016, topped only by the 75-bps cut at the start of the COVID-19 lockdown in March 2020. The rate cut was also not unanimous, with external member Saugata Bhattacharya voting for a 25-bps reduction instead.

 

Malhotra said the current growth-inflation dynamics call for not only continuing with the policy easing but also front-loading rate cuts to support growth, which remains below the central bank's aspiration of around 8% while inflation is seen durably aligned with its 4% target. The RBI lowered its CPI inflation forecast for the current financial year to 3.7% from 4.0%, while the growth projection was left unchanged at 6.5%, despite all the heavy artillery being used.

 

With the 50 bps rate cut on Friday, the MPC has lowered the repo rate by 100 bps in 2025. Malhotra said with 100 bps of cuts in quick succession and in the current circumstances, monetary policy is left with "very limited space to support growth". Hence, the committee changed the policy stance to neutral from accommodative, which was adopted just one meeting ago.

 

"Today's policy decision constitutes a major surprise," analysts at Nomura said in a report. "The combination of a 50 bps cut, a shift in stance to neutral and the CRR cut signals that the RBI's MPC believes the existing space for policy easing has been largely exhausted, and they will be in a wait-and-watch stance now, with policy transmission the key objective," Nomura said. "This suggests that, unless there are major economic surprises, the RBI will be on hold in August and beyond."

 

Malhotra has been focusing on transmission for some time now. After the April MPC meeting, the governor had said he would like policy transmission to happen as fast as possible. The central bank has also been providing liquidity to the banking system to help quicken this transmission.

 

In order to step up policy transmission, Malhotra Friday announced the cash reserve ratio would be cut by 100 bps to 3.0% of net demand and time liabilities in a staggered manner starting September. "The cut in CRR would release primary liquidity of about INR 2.5 lakh crore (INR 2.5 trillion) to the banking system by December," he said. "Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market."

 

RBI's actions and commentary Friday imply that interest rates are unlikely to fall further in the near term. "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," Malhotra said. The change in stance keeps the window open for the RBI to raise rates, if the situation were to so warrant.

 

According to economists at QuantEco Research, the advance announcement of the CRR cut would iron out any uncertainty on liquidity, thereby improving visibility and pricing decisions for the money market. The increase in liquidity from the CRR cut will "further boost monetary policy transmission and obviate the need for any explicit reduction in the monetary policy rate," QuantEco said in a note.

 

Marking a departure from the RBI's regular practice, Malhotra spoke at length about IndusInd Bank, in which an apparent derivative accounting discrepancy turned out be 'suspected fraud'. Such episodes, he said, wouldn't be a bother if they were few and far between, and the managing director's resignation should be "good enough".

 

In another departure from policy statements of the past, the governor did not announce any regulatory measures and the Resolution of the Monetary Policy Committee was not accompanied by the Statement on Developmental and Regulatory Policies.

 

Most economists now expect the MPC to leave the repo rate unchanged at 5.50% over at least the next two meetings in August and October. With the series of unexpected policy decisions on Friday, Malhotra and the RBI have tried to provide certainty for the near future. Essentially, the RBI and MPC have also said their job here is done for now.  End

 

Edited by Avishek Dutta

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2025. All rights reserved.