The Reserve Bank of India’s Monetary Policy Committee (MPC) cut the repo rate by a considerable 50 basis points to 5.50 per cent which is the third consecutive decline since February 2025. The move was taken to increase growth as the level of inflation is still below the MPC’s 4 per cent objective. Asa result of the interest rate cut, those with home loans will benefit, but the savings you keep in a bank can have below-average returns over the next few months.
Banks’ cash reserve ratio was slashed by the central bank by 100 basis points, from 4 to 3 per cent, putting Rs 2.5 lakh crore back into lending by banks.
With the help of RBI Governor Sanjay Malhotra, the MPC has now changed its policy to ‘neutral’ to aid India’s economic growth. This move by the RBI will likely boost borrowing and investment which may increase the economy’s growth. Despite maintaining the 6.5 per cent growth estimate, the policy panel predicted that inflation will come in at 3.7 per cent in the present fiscal.
Why was the repo rate cut?
High retail inflation was the key reason that led to the decision to lower rates by 50 bps. In April, the year-on-year change in India’s consumer price index (CPI) came down to 3.2 per cent which is the lowest since July 2019 and was down from 3.3 per cent in the previous month. Deappearance of inflation in CPI is mainly the result of falling food prices.
Economists say that because CPI hasn’t reached the 4 per cent target this year, rates may be lowered again since inflation is expected to remain below that number in future months. In the FIT system, the RBI is approved by the government to achieve and keep inflation at 4 per cent between +/-2 per cent.
Besides, the RBI predicts a lower GDP growth of 6.5 per cent in the ongoing fiscal, given that trade tariff disagreements with the US are causing some doubts about the economy. “MPC believes that the main inflation rate will continue to be benign. He highlights that it is necessary for the government to cut rates in advance to boost the economy’s growth.
What’s the impact of rate cut on borrowers and savers?
As the Repo rate has gone down 50 bps, the lending rates linked to it will also see a decrease by the same amount. People with home and personal loans could find relief since their EMIs will be decreased by 50 bps
Initially, following the 0.5% cut in the repo rate since February 2025, most banks went on to reduce their repo-linked interest rates by the same amount. Lenders have decreased their MCLR which is the rate at which they offer funds to customers.
Following a reduction in lending rate, banks need to reduce the deposit rate as well. Those who keep their money in the bank will notice that their returns will fall.
Cutting interest rates usually causes bonds to increase in value, so the bond market could enjoy the benefits. Decreasing yields
on government assets may help current bondholders gain more while motivating more people to buy fixed-income assets by improving their yields.
The EMI amount for potential borrowers could be decreased by Rs 800-1,200 per lakh if they have a floating-rate loan which would boost their funds right away. Yet, deposit rates might decrease from close to their highest value of 2.7 per cent on conservative plans which could be bad news for savers.
RBI retains GDP and inflation forecast?
The RBI changed its estimation for real gross domestic product (GDP) and inflation figures in the FY2026 forecast.
The GDP growth rate is estimated to be 6.5 per cent for the period from 2025 to 2026. At the beginning of 2025, the domestic economy saw its growth rise to a four-quarter record of 7.4 per cent. The economy grew at a rate of 6.5 per cent in 2024-25 which is the lowest it has been for four years.
India is likely to be the fastest growing major economy in the coming years as private spending grows, banks and companies are strong, finances improve and as a result of government’s strong investments, it stated in the RBI report.
