India central bank cuts interest rate anew to boost growth

MUMBAI (ICIS)–India’s central bank on Friday reduced its benchmark interest rate for the third consecutive time, while retaining its 6.5% GDP growth forecast for the fiscal year ending March 2026.

• 50-basis point cut bigger-than-expected; monetary policy stance revised to “neutral”
• Banks’ cash reserve ratio cut by 100bps to 3.0%
• FY2025-26 average inflation forecast cut to 3.7% from 4.0%

The Reserve Bank of India (RBI) delivered a surprise 50-basis point (bps) cut in its policy interest rates to 5.50%, while changing its monetary policy stance to “neutral” from “accommodative”.

Market players were expecting a 25bps cut, like in the two previous monetary policy meetings.

“After having reduced the policy repo rate by 100 basis points in quick succession since February 2025, the RBI is left with very limited space to support growth,” it said.

“Hence, the RBI’s monetary policy committee (MPC) decided to change the stance from accommodative to neutral,” the central bank said.

The neutral stance will allow the central bank to maintain flexibility in adjusting policy rates based on prevailing economic conditions.

The RBI first lowered its repo rate by 25bps to 6.25% in February after keeping it unchanged for two years; followed by another 25bps cut in April.

The central bank also cut its cash reserve ratio (CRR) by 100 basis points to 3.0%, in a bid to boost liquidity in the financial system and encourage credit growth.

It had last cut the CRR – which is the percentage of a bank’s total deposits that must be parked with the central bank – in December 2024, as it was trying to rev up economic activity.

India’s central bank conducts its monetary policy review every two months.

While GDP growth projections for financial year 2025-26 have been retained at 6.5%, “geopolitical tensions and weather vagaries may pose headwinds,” RBI governor Sanjay Malhotra said.

India – a major importer of petrochemicals – is the third biggest economy in Asia and is a giant emerging market.

Its GDP growth rate in fiscal year ending March 2025 weakened to a four-year low of 6.5% amid global uncertainties over US tariffs.

“The uncertainty around the global economic outlook has ebbed somewhat since April in the wake of temporary tariff reprieve and optimism around trade negotiations. However, it continues to remain elevated to weaken sentiments and lower global growth prospects,” the central bank said.

While trade policy uncertainty continues to weigh on India’s merchandise export prospects, the conclusion of free trade agreement (FTA) with the UK and progress with other countries will help domestic trade, it added.

Meanwhile, the RBI has brought down its retail inflation projection for the current financial year to 3.7% from the earlier projected 4.0%, citing a sharp correction in food prices.

In April, India’s retail inflation eased to a six-year low of 3.16% as food prices increased at a slower pace.

“Inflation has softened significantly over the last six months. The outlook now gives us the confidence of not only a durable alignment of headline inflation with the target of 4% but also the belief that during the year, it is likely to undershoot the target at the margin,” Malhotra said.

Core inflation is expected to remain benign with an easing of international commodity prices in line with the anticipated global growth slowdown, he added.

Inflation forecasts	New (6 June)	Previous forecast
Financial year 2025-26	3.7%	4.0%
April-June (Q1)	2.9%	3.6%
July-September (Q2)	3.4%	3.9%
October-December (Q3)	3.9%	3.8%
January-March (Q4)	4.4%	4.4%

Source: RBI

Focus article by Priya Jestin