RBI Likely to Cut Repo Rate to 5.75% as Inflation Softens and Growth Holds Steady

Mumbai | June 2 – “When consumer price inflation is decisively around its target rate of 4 per cent and growth is still moderate and recovering, monetary policy needs to nurture domestic demand impulses to further increase the growth momentum,” said RBI Governor Sanjay Malhotra recently. His words set the stage for the Reserve Bank of India’s (RBI) anticipated decision to ease policy further in its upcoming Monetary Policy Committee (MPC) meeting scheduled from June 4 to 6.

The central bank is widely expected to reduce the key policy repo rate by 25 basis points (bps), bringing it down to 5.75%. This would be the third consecutive cut in the repo rate since February 2025, signalling the RBI’s ongoing commitment to support India’s growth trajectory amid sustained low inflation. Alongside the rate cut, the six-member MPC is also predicted to maintain its ‘accommodative’ monetary policy stance, ensuring that adequate liquidity and credit flow continue to fuel economic activity.

Inflation Falls to Multi-Year Lows

India’s retail inflation, as measured by the Consumer Price Index (CPI), eased to 3.2% in April 2025 — the lowest level seen since July 2019. This decline was driven largely by falling food prices, which have been on a steady downtrend in recent months. CPI inflation has stayed below the RBI’s mandated target of 4% for three consecutive months (February to April), offering the central bank some breathing room to ease interest rates without stoking inflationary pressures.

Under the flexible inflation targeting (FIT) framework, the RBI is mandated to keep inflation close to 4%, with a tolerance band of +/- 2%. The 2024-25 RBI annual report highlighted, “A benign inflation outlook and moderate growth warrant monetary policy to be growth-supportive, while remaining watchful about the rapidly evolving global macroeconomic conditions.” This reflects the balancing act the RBI faces: fostering growth while remaining alert to external risks.

MPC Expected to Retain Accommodative Stance 

In its April meeting, the MPC shifted its stance from ‘neutral’ to ‘accommodative’, signalling a clear focus on supporting economic recovery. Market observers expect this stance to be maintained in June, given the subdued inflation and the need to encourage private consumption and investment.

Commentary on inflation and GDP growth forecasts will be closely watched, especially considering evolving global challenges and trade uncertainties.

Forecast Revisions Expected

The RBI is also likely to update its growth and inflation outlook for FY26. Currently, CPI inflation is projected at 4%, while real GDP growth is pegged at 6.5% for the year.

India’s economy expanded at a robust 7.4% in the January–March 2025 quarter, the fastest pace in a year. The full-year growth for FY25 came in at 6.5%. The central bank has highlighted that easing global commodity prices, improved supply chains, and expectations of an above-normal monsoon could support both inflation control and rural demand recovery.

What a Repo Rate Cut Means for Borrowers

A reduction of 25 basis points in the repo rate will likely trigger a corresponding decline in external benchmark lending rates (EBLR) and marginal cost of funds-based lending rates (MCLR) offered by banks. This will translate into lower Equated Monthly Instalments (EMIs) for borrowers on home loans, personal loans, and other credit facilities, easing the debt servicing burden for households.

Such relief could also stimulate consumer spending, supporting broader economic demand. Since February 2025, the RBI has already cut the repo rate by 50 bps, and banks have largely passed on these cuts to borrowers, contributing to a softer lending environment.

Growth Outlook: Steady, But Watchful

While the immediate outlook points to a repo rate cut in June, the RBI’s future policy decisions will depend heavily on incoming data related to inflation, growth, and external developments. The central bank remains committed to prudent liquidity management to keep the financial system stable and responsive to the needs of the economy.

Governor Malhotra’s earlier remarks emphasise the need to “nurture domestic demand impulses” — an acknowledgment that monetary policy will continue to play a supportive role in India’s economic growth journey, even as the RBI stays alert to emerging risks.

The RBI is expected to keep a close eye on geopolitical developments, especially the anticipated end of the US tariff reprieve in July, which could influence trade dynamics and commodity prices, potentially impacting inflation and growth prospects.

Stay tuned to PL Capital for expert insights on RBI policy decisions, market movements, and investment strategies.