R. Suryamurthy
As the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) concludes its three-day meeting on June 6, 2025, a broad consensus among economists points to a 25 basis points (bps) cut in the benchmark repo rate, lowering it to 5.75%. This anticipated move, which would mark the third consecutive rate cut this year, signals the RBI’s accommodative stance to stimulate a slowing economy while navigating global uncertainties.
India’s economic growth has faced headwinds, with Q2 FY25 GDP growth slowing to 5.4%—a seven-quarter low. While Q4 FY25 saw a stronger rebound to 7.4%, the full fiscal year FY25 growth settled at a four-year low of 6.5%. This persistent slowdown has intensified calls for monetary easing to boost domestic demand. The RBI has already revised its FY25 GDP growth forecast to 6.6% and projects 6.5% for FY26, though some, like Goldman Sachs, foresee a slightly lower 6.1% for FY26 due to global trade pressures.
Adding to the complexity are global factors. The looming threat of renewed U.S. tariffs, potentially as high as 104% under the Trump administration, and a weakening Chinese yuan (having already breached 7.40 per dollar) are creating market volatility and putting pressure on the Indian rupee, which has depreciated over 2% in 2025. The RBI is expected to utilise liquidity tools like Open Market Operations (OMOs) and forex management to mitigate these external risks and stabilise the currency. The RBI has already injected significant liquidity into the system, including ₹1.25 lakh crore via OMO purchases in May 2025 and earlier USD/INR buy/sell swaps, to address a projected ₹2.5 trillion deficit by March 2025.
On the inflation front, there’s a glimmer of relief. Consumer Price Index (CPI) inflation has eased considerably, registering 3.61% in February 2025 and a multi-year low of 3.16% in April 2025, comfortably below the RBI’s 4% target. This benign inflationary environment, further supported by healthy kharif and rabi crop outputs and subdued crude oil prices (forecast to average $65-70 per barrel this fiscal), provides the MPC with the necessary policy space to prioritise growth.
Economists are largely aligned on the need for a rate cut. Sonal Varma, Managing Director and Chief Economist (India and Asia ex-Japan) at Nomura, anticipates further 25 bps cuts in June and August. She stated, “With inflation at target, the MPC’s focus is supporting growth, amid rising downside risks to growth from US tariffs. We expect the rate cutting cycle to continue, with a 25bp cut each in June and August.”
Madan Sabnavis, Chief Economist at Bank of Baroda, echoes this sentiment, suggesting a potential 25-50 bps cut through the year, with a cautious eye on monsoon outcomes. He commented, “Given the change in stance to accommodative, which has been clarified as referring not to liquidity but future rate action, we may expect another 25-50 bps cut through the year. A pause in June is possible as the monsoon is gauged.”
Indranil Pan, Chief Economist at YES Bank, forecasts a terminal repo rate of 5.75%, stating, “With inflation forecast for FY26 at 4.2%, a 150-bps real interest rate means that the repo rate can go down to 5.75%. Thus, my base case is for the terminal repo rate at 5.75% (another 50 bps cut from here on).” Aastha Gudwani, Economist at Barclays, highlights the policy space opened by favourable inflation and growth outcomes, noting, “As the RBI MPC is faced with inflation and growth outcomes that are below their estimated trajectory, it opens policy space to deliver a second successive policy repo rate cut.”
Notably, SBI Research has advocated for a bolder 50 bps cut, stating in an X post, “As the #RBIMPC gears up for its June meeting, #SBI Research expects India’s central bank to deliver a jumbo 50 bps #reporate cut, citing slowing growth, easing inflation, and surplus liquidity as key triggers.”
Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, also anticipates a June cut, stating, “We expect the benign inflation and soft growth to continue to provide the MPC room for incremental monetary easing, with 25bp cut in the upcoming June policy.”
The implications of a rate cut are far-reaching. Lower repo rates translate to reduced borrowing costs for banks, which are expected to pass on these benefits to businesses and consumers, thereby stimulating credit growth, investment, and overall demand. This is likely to be positive for equity markets, particularly credit and consumption-sensitive sectors like banking, real estate, and autos. Bond prices are also expected to rise, benefiting existing bondholders.
However, the impact on the Indian Rupee will be closely watched. While lower interest rates can reduce foreign capital inflows, the RBI’s accommodative stance aims to balance growth with currency stability, leveraging its forex management tools. For conservative investors and senior citizens, the rate cut will likely lead to lower returns on fixed income instruments and government-backed social security schemes like PPF and Senior Citizen Savings Scheme (SCSS), as their interest rates are often linked to bond yields.
The RBI’s guidance on future cuts and liquidity measures will be a key determinant of market sentiment. While a 25 bps cut appears largely priced in, the central bank’s commentary on navigating global trade risks, especially with the U.S. tariff reprieve expiring in July, and its commitment to ensuring adequate system liquidity will be crucial for the Indian economy’s trajectory in the coming months.