RBI Policy Meeting: No Tariff Fear! MPC Cuts Repo Rate By Whopping 50 Bps, Lowest Since August 2022

The Reserve Bank of India (RBI) surprised the street with a whopping 50 basis points cut in the key repo rate on Friday, June 6. This will be the third rate cut this year. The MPC also eased the monetary policy stance to 'Neutral' from 'Accommodative.'

The rate decision is in line with a GoodReturns poll of 50 economists; however, the 50 basis point rate cut comes as a surprise. The majority of the economists had predicted 25 basis points owing to a sharp cooling in CPI inflation and a surge in economic growth.

The six-member MPC commenced the second bi-monthly monetary policy meeting for FY26 on June 4th, with the outcomes announced on June 6th.

RBI Repo Rate Cut:

With the latest 50 bps cut, the repo rate now stands at 5.50% effective immediately. Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) shall stand adjusted to 5.25%, and the marginal standing facility (MSF) rate and the bank rate to 5.75%.

This decision is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth.

So far, in 2025, RBI has trimmed the repo rate by 100 basis points from the February 2025 policy to the June 2025 policy. The rate cut will heavily impact fixed deposits and lending rates at banks.

This is the lowest repo rate in 3 years. The last time the repo rate was below 6% was in the September 2022 policy. However, repo rate is now the lowest since August 2022, when it stood at 5.40%. In September 2022 policy, repo rate was at 5.90%.

RBI Changes Stance:

Under the current circumstances, RBI said, "monetary policy is left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral."

However, RBI also said that 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. The fast-changing global economic situation too necessitates continuous monitoring and assessment of the evolving macroeconomic outlook.

RBI Growth and Inflation Outlook Amidst Global Uncertainty:

"The uncertainty around the global economic outlook has ebbed somewhat since the MPC met in 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. Accordingly, global growth and trade projections have been revised downwards by multilateral agencies," said RBI's note.

Going forward, RBI said, "economic activity continues to maintain the momentum in 202526, supported by private consumption and traction in fixed capital formation. The sustained rural economic activity bodes well for rural demand, while continued expansion in services sector is expected to support the revival in urban demand."

For the economy, RBI has predicted real GDP growth at 6.5% for FY26, which is unchanged from previous policy. The central bank forecasted real GDP growth at 6.5% in Q1 of FY26, followed by economic growth of 6.7% in Q2, 6.6% in Q3 and 6.3% in Q4.

India's latest gross domestic product (GDP) surged to 7.4 percent in Q4FY25, reclaiming the 'fastest-growing' economy title in the world. The GDP growth rate surpassed market estimates of 6.7 percent and the RBI's target of 7.2 percent for the fourth quarter of 2024-25.

On inflation, RBI said, "CPI headline inflation continued its declining trajectory in March and April, with headline CPI inflation moderating to a nearly six-year low of 3.2 per cent (year-onyear) in April 2025. This was led mainly by food inflation which recorded the sixth consecutive monthly decline. Fuel group witnessed a reversal of deflationary conditions and recorded positive inflation prints during March and April, partly reflecting the hike in LPG prices. Core inflation remained largely steady and contained during March-April, despite increase in gold prices exerting upward pressure."

The outlook for inflation points towards benign prices across major constituents. The record wheat production and higher production of key pulses in the Rabi crop season should ensure adequate supply of key food items. Going forward, the likely above normal monsoon along with its early onset augurs well for Kharif crop prospects. Reflecting this, inflation expectations are showing a moderating trend, more so for the rural households, it added.

Accordingly, RBI has projected CPI inflation for the financial year 2025-26 at 3.7 percent, with Q1 at 2.9 percent, Q2 at 3.4 percent, Q3 at 3.9 percent, and Q4 at 4.4 percent (Chart 2). The risks are evenly balanced. The CPI inflation target has been lowered.

Market Reaction After RBI Rate Cut:

After opening lower, both Sensex and Nifty gained momentum to trade nearly 1% up. Investors welcomed the 50 basis points cut with open arms. Sensex traded at 81,976.95, higher by 534.91 points or 0.66%, at the time of writing. The 30-scrip benchmark crossed its 82,000 mark after the rate cut announcement, to hit an intraday high of 82,033.98.

Meanwhile, Nifty 50 also climbed by 180.85 points or 0.73% to trade at 24,931.75. The benchmark neared its 25,000 mark, by hitting an intraday high of 24,947.85.

" Market volatility has eased in the recent period with equity markets staging a recovery, dollar index and crude oil softening though gold prices remain high," RBI said in its policy statement.

No Tariff Fear:

The MPC members led by RBI governor Sanjay Malhotra cut rates despite the global uncertainties looming due to geopolitical tensions, trade war escalation and intense tariff hikes. Not just that RBI also defied the 'pause' trend of US Federal Reserve's for the third time.

Fed officials assessed that the announced tariff increases had been significantly larger and more extensive than anticipated and noted considerable uncertainty surrounding the direction of trade policy and the magnitude, scope, timing, and duration of its economic effects, minutes from the May FOMC meeting showed. Policymakers viewed this uncertainty as unusually high and judged that downside risks to employment and economic activity, as well as upside risks to inflation, had increased. In discussing the outlook for monetary policy, participants agreed that, with economic growth and the labor market remaining solid and current policy stance moderately restrictive, the Fed was well positioned to remain patient and await greater clarity on inflation and economic trends. The Federal Reserve kept the funds rate at 4.25%-4.50% for a third consecutive meeting in May 2025, in line with expectations, as per Trading Economics.

The minutes of the MPC's meeting will be published on June 20, 2025.

The next meeting of the MPC is scheduled from August 4 to 6, 2025.