[MUMBAI] The Reserve Bank of India (RBI) cut its key repo rate by a larger-than-expected 50 basis points on Friday, a third consecutive reduction, and slashed the reserve ratio for banks as muted inflation provided space for policymakers to focus on supporting economic growth.
The Monetary Policy Committee (MPC), which consists of three RBI officials and three external members, cut the repo rate to 5.50 per cent. It has now cut rates by 100 basis points in 2025, starting with a quarter-point reduction in February, its first cut since May 2020. It made a similar-sized cut in April.
The RBI also cut the cash reserve ratio by 100 basis points to 3 per cent, adding to already surplus liquidity.
India’s benchmark 10-year bond yield was down 2 basis points at 6.18 per cent, after dropping 10 basis points earlier, while the rupee was little changed at 85.82, after dropping as much as 0.2 per cent. The benchmark equity indexes also turned lower after advancing in the wake of the decision and were down around 0.1 per cent each.
The monetary policy stance was changed from accommodative to neutral.
Explaining Friday’s cut, RBI Governor Sanjay Malhotra said inflation had softened significantly, giving space for continuing policy easing and front loading of rate cuts. The central bank has a 4 per cent inflation target. Weakening inflation gives space for continuing policy easing and front loading of rate cuts, Malhotra added.
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Retail inflation has slowed more quickly than expected in recent months and dropped to a near 6-year low of 3.16 per cent in April, sharply below the RBI’s medium-term target of 4 per cent.
The central bank now expects inflation to average 3.7 per cent in the current financial year, lower than its previous projection of 4 per cent.
India’s economy has been resilient, with GDP growth surging to 7.4 per cent in the January-March quarter.
India is already growing at a fast pace but aspires to grow at a higher pace, Malhotra said.
For the current financial year, GDP growth is projected at 6.5 per cent by the central bank, unchanged from its previous forecast. REUTERS
