RBI Monetary Policy to Announce Repo Rate Cut to 5.75% Amid Inflation

RBI Monetary Policy Committee is all set to announce a repo-rate cut of 25 Basis Points (BPS) in its next meeting set between 4th June and 6th June. Inflation in India stays below the central bank’s target of 4%. Thus, the consensus of economists led to the decision to cut the repo rate. 

Why Rate Cut?

The primary aim behind the repo rate cut is to reduce the sharp moderation of inflation, which offers room for monetary loosening. The Consumer Price Index (CPI) moderated to 3.2% in April, its lowest level since July 2019. Inconsistent decline in food prices resulted in this moderation. 

Economists say that since inflation has remained below the 4% target for three months in a row (February, March, and April), CPI must be kept permanently anchored to the 4% target for a 12-month horizon. Under the flexible inflation targeting (FIT) policy, the RBI is required to maintain the CPI at 4% with a +/-2% band. As per RBI's annual report 2024-25, "benign inflation scenario and moderate growth warrant monetary policy to be growth oriented, but keep watch on the rapidly evolving global macroeconomic situation with caution.".

Impact of Repo Rate & Future Prospects

A fall in the repo rate by 25 BPS would help borrowers because all the external benchmark lending rates (EBLR) based on it would decrease to the same extent. This would mean a cut in equivalent monthly payments (EMIs) on house and personal loans.

After a 50 BPS cut in the repo rate from February 2025, most banks have already transmitted this cut in repo-linked lending rates as well as their marginal cost of funds-based lending rates (MCLR).

Analysts anticipate further weakening during the current fiscal year. After the anticipated drop in June, the RBI is seen to cut a total of 50 BPS this fiscal year.

ICRA Ltd. chief economist Aditi Nayar predicts "two more cuts in the next two policy reviews," with the repo rate reducing to 5.25% by the conclusion of the ongoing cycle. This sustained focus on growth assistance, supported by a good inflation background, is likely to define India's monetary setup over the next few months.

Final Thoughts

The RBI Monetary Policy Committee is to announce a repo rate cut amid falling inflation. CPI fall leveraged economists to bring the repo rate lower to 5.75%. Post 50 BPS cut in the repo rate from February 2025, most banks have already transmitted this cut in repo-linked lending rates as well as their marginal cost of funds-based lending rates.

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