In a move that has surprised many and brought cheer to borrowers, the Reserve Bank of India (RBI) cut the repo rate by 50 basis points to 5.5% during its June 2025 Monetary Policy Committee (MPC) meeting. This is the third consecutive rate cut by the RBI, following reductions of 25 basis points each in February and April. This latest cut means a cumulative reduction of 100 basis points since February of this year.

The MPC, led by Governor Sanjay Malhotra, commenced its three-day discussions on Wednesday, culminating in the announcement. The decision to cut the repo rate is aimed at maintaining growth momentum, given the changing economic outlook. The repo rate is the rate at which the RBI lends to commercial banks, and a reduction typically translates to lower borrowing costs for consumers and businesses.

Alongside the repo rate cut, the RBI also announced a reduction in the Cash Reserve Ratio (CRR) by 100 basis points, bringing it down to 3%. These measures indicate a clear intent to boost the economy.

The central bank has revised the inflation outlook for FY26 downwards to 3.7% from the earlier projection of 4%. The MPC also decided to retain the GDP growth forecast for the current fiscal year at 6.5%, while acknowledging potential headwinds from geopolitical tensions and unpredictable weather patterns. The central bank expects seasonal rainfall to reach 105% of the Long Period Average (LPA), with a margin of +/-5%.

The rate cut is expected to have several positive impacts. Firstly, it will likely lead to lower EMIs (Equated Monthly Installments) on loans, providing relief to both existing and new borrowers. Banks are expected to lower their EBLRs (External Benchmark-based Lending Rates) and MCLR (Marginal Cost of Funds-based Lending Rate), which are linked to the repo rate. Secondly, it could stimulate demand in sectors like real estate, where lower interest rates can improve affordability and drive home ownership, particularly in the affordable and mid-income segments. Thirdly, it is anticipated to benefit the bond market, as falling interest rates typically lead to a rise in bond prices.

However, Governor Malhotra cautioned that the central bank now has limited room to further support growth. As a result, the monetary policy stance has been changed from ‘accommodative’ to ‘neutral’. This shift indicates that the RBI will be more data-dependent in its future decisions, carefully balancing the need to support growth with the objective of maintaining price stability.

The decision comes at a time when the Indian economy demonstrates resilience amidst global uncertainty. The RBI has emphasized the importance of price stability for preserving purchasing power and fostering a conducive environment for savings, investment, and overall economic activity.