MPC opted for Another Rate Cut
On 6th June 2025, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), has announced its Monetary Policy Statement. MPC has opted for rate cuts. Let us see the MPC statement in detail now.
MPC opted for Another Rate Cut – Monetary Policy Statement, June 2025
MPC unanimously reduced the key policy rate (i.e. repo rate) by 50 basis points to 5.50% with immediate effect.
As a result, the Standing Deposit Facility (SDF) rate shall stand adjusted at 5.25% and the Marginal Standing Facility remains at 5.75%.
The decision aligns to reach a medium-term CPI inflation target of 4% with a band of +/- 2%, all while also promoting growth. The MPC changes its stance from accommodative to neutral.
MPC on Gross Domestic Product (GDP) Estimates
The National Statistical Office (NSO) released provisional estimates (May 30, 2025), showing a 6.5% real GDP growth and 6.4% real GVA growth for the fiscal year 2024-25. Preliminary estimates from the NSO show that real GDP growth in Q4: 2024-25 was 7.4%, up from 6.4% in Q3. On the supply side, Real gross value added (GVA) also increased by 6.8% in Q4.
In 2025-26, economic activity is expected to maintain its momentum, mainly driven by private consumption and fixed capital formation. Rural demand is expected to remain strong due to sustained rural economic activity, while the services sector is likely to support the revival in urban demand.
Investment activity is projected to improve as capacity utilization increases, corporate balance sheets strengthen, and government capital expenditure increases. However, uncertainty in trade policies may impact merchandise exports, although the conclusion of free trade agreements with countries like the United Kingdom could boost trade activity.
On the supply side, Agriculture is expected to perform well due to a forecast of above-normal southwest monsoon and resilient allied activities. The services sector is also expected to continue its positive growth. Despite these positive factors, geopolitical tensions, global trade uncertainties, and weather-related risks could pose challenges to growth.
Overall, real GDP growth for 2025-26 is projected at 6.5%, with quarterly growth rates of 6.5% in Q1, 6.7% in Q2, 6.6% in Q3, and 6.3% in Q4. It also stated that “the risks are evenly balanced”.
MPC on Inflation
The headline inflation rate, as measured by the Consumer Price Index (CPI), has been on a downward trend in March and April. In April 2025, the year-on-year CPI inflation rate reached a nearly six-year low of 3.2%. This decline was mainly driven by a decrease in food prices, which have been falling for six consecutive months.
On the other hand, fuel prices saw a reversal of deflationary trends and recorded positive inflation rates, partly due to an increase in LPG prices.
Core inflation, which excludes food and energy prices, remained stable during March and April, despite an increase in gold prices.
Looking ahead, the inflation outlook appears to be favourable. Record wheat production and higher production of key pulses in the Rabi crop season are expected to ensure an adequate supply of essential food items. Additionally, the projection of an above-normal monsoon and its early arrival is good for the prospects of the Kharif crop. As a result, inflation expectations are decreasing, especially among rural households.
Projections indicate that prices of key commodities, including crude oil, are likely to continue moderating. However, there are still potential risks to consider, such as weather-related uncertainties and evolving tariff concerns that could impact global commodity prices.
Taking all these factors into account, and assuming a normal monsoon, the CPI inflation rate for the financial year 2025-26 is projected to be 3.7%. The quarterly breakdown of this projection is as follows: 2.9% percent for Q1, 3.4% for Q2, 3.9% for Q3, and 4.4% for Q4. It also stated that “the risks are evenly balanced”.
The rationale behind decisions and MPC Stance
Inflation has decreased significantly over the past six months, falling below the target of 4%. The inflation outlook has also been revised downwards from the earlier forecast of 4.0% to 3.7%. This is mainly due to soft food inflation and benign core inflation, as well as easing international commodity prices.
On the other hand, economic growth remains lower than desired, given the challenging global environment and heightened uncertainty. To address this, the MPC has decided to continue stimulating domestic private consumption and investment through policy levers to boost growth.
As a result, the policy repo rate has been reduced by 50 basis points to 5.50%. This follows a series of rate cuts totalling 100 basis points since February 2025.
However, the MPC acknowledges that there is limited space for further monetary policy support to drive growth. As a result, the stance has been changed from accommodative to neutral.
Moving forward, the MPC will carefully monitor incoming data and the evolving outlook to determine the future course of monetary policy and strike the right balance between growth and inflation. The fast-changing global economic situation also requires continuous monitoring and assessment of the macroeconomic outlook.
Among all members of MPC, all except one member voted for a 50 basis point cut. Shri Saugata Bhattacharya voted for a 25 bps cut in the repo rate.
On 6th June 2025, in the Governor’s Statement, the RBI governor stated that “The Reserve Bank remains committed to provide sufficient liquidity to the banking system. To further provide durable liquidity, it has been decided to reduce the cash reserve ratio (CRR) by 100 basis points (bps) to 3.0 per cent of net demand and time liabilities (NDTL) in a staggered manner during the course of the year.”
The RBI has planned to reduce the Cash Reserve Ratio (CRR) in four equal tranches of 25 basis points each, starting from September 6, 2025. This reduction is expected to release approximately ₹2.5 lakh crore of primary liquidity to the banking system by December 2025.
My Perspective and Takeaways
This is the third consecutive rate cut in the last three MPC meetings. Earlier, RBI opted for a Rate cut in February and April 2025.
It may be a surprise for many, however, this is expected as the present inflation level is well under the inflation target of RBI. Keeping inflation under control remains the main aim of RBI.
However, the only thing worrying is that the policy measures and outcomes from it always have a time lag and policymakers shouldn’t overlook/ignore it.
The RBI governor’s statement of reduction of CRR to increase the liquidity in the economy raises some concerns. As many may not observed there are also adjustments in the Bank rate (reduction of 50 basis points). This means there will be increase liquidity in the economy. This also means sooner there will be money inflation followed by price inflation.
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