RBI cuts key rate by 25 basis points, growth projection lowered to 6.5%

He warned that tariffs will impede domestic growth and may have a negative impact on net exports. Malhotra, however, said the impact on domestic inflation is unlikely to be very concerning due to easing of commodity and crude oil prices.

The six-member rate-setting panel changed the monetary policy stance from ‘neutral’ to ‘accommodative’, signalling more cuts in the offing.

“After a detailed assessment of the evolving macroeconomic and financial conditions and outlook, the MPC voted unanimously to reduce the policy repo rate by 25 basis points to 6 per cent with immediate effect,” Malhotra said. One basis point (bps) is one-hundredth of a percentage point.

The cut in repo rate will provide relief to borrowers of various loans, including home and personal, as their equated monthly instalments (EMIs) will decline by 25 bps. The cut will also lead to a reduction in bank deposit rates.

This is the second consecutive policy when the MPC has slashed the repo rate — the rate at which the RBI lends money to banks to meet their short-term funding needs — by 25 bps. In the February policy, the MPC, for the first time in nearly five years, reduced the repo rate to 6.25 from 6.5 per cent.

The RBI revised downwards the real gross domestic product (GDP) forecast for 2025-26 at 6.5 per cent from 6.7 per cent projected in the February 2025 policy.

“This downward revision essentially reflects the impact of global trade and policy uncertainties,” Malhotra said.

Speaking on the possible implications of tariff related uncertainties, he said, “First and foremost, uncertainty in itself dampens growth by affecting investment and spending decisions of businesses and households.”

The dent on global growth due to trade frictions will impede domestic growth. Higher tariffs shall have a negative impact on net exports.

“There are, however, several known unknowns — the impact of relative tariffs, the elasticities of our export and import demand; and the policy measures adopted by the government including the proposed Foreign Trade Agreement with the US, to name a few. These make the quantification of the adverse impact difficult,” he said.

Malhotra, however, said the impact of higher tariffs on India would be much less than other countries.

He said the risks to inflation, on the other hand, are two-sided. On the upside, uncertainties may lead to possible currency pressures and imported inflation. On the downside, slowdown in global growth could entail further softening in commodity and crude oil prices, putting downward pressure on inflation.

“Overall, while global trade and policy uncertainties shall impede growth, its impact on domestic inflation, while requiring us to be vigilant, is not expected to be of high concern,” he said.

“More than inflation, we are concerned about its (trade uncertainties) impact on growth,” Malhotra told reporters during the post policy interaction.

The RBI also revised the consumer price inflation (CPI) forecast for the financial year 2025-26 to 4 per cent, as against an earlier expectation of 4.2 per cent.

The MPC changed the policy stance to ‘accommodative’ from ‘neutral’.

“With respect to the policy rate, which is the mandate of the MPC, today’s change in stance from ‘neutral’ to ‘accommodative’ means that going forward, absent any shocks, the MPC is considering only two options — status quo or a rate cut,” Malhotra said.

He clarified that the stance should not be directly associated with liquidity conditions.

Asked to comment on an observation that following various measures announced in the Union Budget 2025-26 to boost consumption, it was now the RBI’s turn to do heavy lifting in supporting the economy, Malhotra said it is always a collaborative effort.

In the Budget, the government took a large number of measures in terms of increasing capex and providing tax rebates on the personal income tax side, he said.

“We have reduced repo rates and have changed the stance, which means that going forward, the direction of the policy repo rate is downwards. Where it (interest rate) will reach, we really don’t know. I am Sanjay, but I am not the Sanjay of Mahabharat to be able to foresee that far. I do not have that divine vision that he had. But we will jointly try to manage the growth and the inflation dynamics in our country,” he said.

On liquidity, the Governor said the Reserve Bank was committed to provide sufficient system liquidity. The RBI will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure adequate liquidity, he said.

Commenting on the policy, State Bank of India’s Chairman C S Setty said the RBI rate cut coupled with the revision in stance to accommodative was a swift, timely move and a forward guidance to the market to stay supportive against evolving global uncertainties.

“The revision of stance to accommodation will cushion the secondary impact of tariffs on the domestic economy. With inflation under check, growth imperatives will take precedence in FY26,” he said.

HDFC Bank’s Principal Economist Sakshi Gupta said the change in stance from neutral to accommodative is a decisive signal from the RBI that further rate cuts are in the offing. The overall tone of the policy statement was dovish with a clear emphasis on supporting growth amidst rising global headwinds.

“We expect two more rate cuts in 2025 with the policy rate expected at 5.5 per cent (earlier expectation of 5.75-5.5 per cent range), with the next rate cut likely to be delivered in the June policy,” she said.

Gupta expects monetary policy transmission, of the 50 bps rate cuts provided since February, to money market rates and the deposit rates to start improving going forward as liquidity conditions remain comfortable.