As the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) concludes its three-day meeting on June 6, 2025, a chorus of economists is advocating for a substantial 50 basis points (bps) cut in the repo rate to invigorate India's economic growth. This push for a more aggressive monetary easing comes against the backdrop of steadily declining inflation and concerns about uneven demand and subdued credit growth.

Currently, the repo rate, the key policy rate at which banks borrow funds from the RBI, stands at 6%. The central bank has already reduced the rate twice this year, each time by 25 bps in February and April, in an attempt to stimulate economic activity. While a segment of analysts anticipates a continuation of this gradual easing with another 25 bps cut, a growing number of economists are making a case for a bolder 50 bps reduction.

Rationale Behind the Call for a Larger Rate Cut

Several factors underpin the economists' call for a more significant rate cut.

• Benign Inflation: Retail inflation has remained below the RBI's 4% target for the past three months, creating room for the central bank to prioritize growth. The easing in the Consumer Price Index (CPI) has been primarily driven by a sustained fall in food prices. Experts believe that CPI is likely to align durably with the 4% target over the next 12 months.
• Uneven Demand and Subdued Credit Growth: Despite India's impressive GDP growth, demand growth has been uneven, with regulatory curbs on unsecured loans impacting retail credit demand. A larger rate cut is seen as a means to revive the credit cycle and boost economic momentum.
• Global Economic Uncertainty: The global economic outlook remains subdued amid rising trade tensions, policy uncertainty, and a decline in cross-border investments. A "jumbo" rate cut could act as a counterbalance to these external uncertainties.

Potential Impact of a 50 bps Rate Cut

A 50 bps cut in the repo rate is expected to have several positive effects on the Indian economy.

• Lower Borrowing Costs: A significant rate cut would ensure lower borrowing costs for businesses and consumers, encouraging investment and spending.
• Revived Credit Cycle: A large rate cut could reinvigorate the credit cycle, leading to increased lending by banks and boosting economic activity.
• Boost to Urban Demand: A 50 bps rate cut is expected to stimulate urban demand, which has been lagging in recent months.
• Positive Impact on Bond Market: A cut in the repo rate could increase foreign capital inflows into the Indian debt market, leading to lower domestic bond yields and benefiting government borrowing and the corporate bond market.
• Improved Housing Affordability: Further reductions in home loan EMIs can be expected, making housing more affordable.

Expert Opinions

Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India, believes that a 50 bps rate cut in the June 2025 policy is warranted, as it could reinvigorate a credit cycle. Debopam Chaudhuri, chief economist at Piramal Enterprises, echoed this view, stating that the MPC should consider a larger-than-expected 50 bps rate cut to deliver a stronger boost to economic growth. D. K. Joshi, Chief Economist, Crisil Ltd said that there is an opportunity to press the monetary lever as inflation has come down much faster than expected.

Considerations and Counterarguments

While the majority leans towards a 50 bps cut, some experts advocate for a more cautious approach. They suggest a 25 bps cut in the June policy, followed by another reduction in the subsequent meeting, to allow the RBI to assess the transmission of monetary policy to lending and deposit rates.

RBI's Mandate and Flexibility

Under the flexible inflation targeting (FIT) framework, the RBI is mandated to maintain CPI at 4% with a band of +/-2%. The RBI's annual report for 2024-25 stated that the "benign inflation outlook and moderate growth warrant monetary policy to be growth supportive, while remaining watchful about the rapidly evolving global macroeconomic conditions." This highlights the RBI's flexibility to prioritize growth while keeping a close eye on inflation.

Conclusion

As the MPC prepares to announce its decision, the debate over the magnitude of the repo rate cut reflects the delicate balance between supporting economic growth and maintaining price stability. While a 25 bps cut is widely anticipated, the growing support for a more aggressive 50 bps reduction underscores the urgency to address uneven demand and revitalize the credit cycle in the face of global economic uncertainties. The decision will be crucial in shaping India's economic trajectory in the coming months.