Monetary Policy Review – June 2025: RBI Surprises with Aggressive Moves to Support Growth
In a bold and unexpected move, the Reserve Bank of India’s Monetary Policy Committee (MPC) announced a 50 basis points (bps) cut in the policy repo rate, bringing it down to 5.5%, while simultaneously shifting the policy stance from ‘accommodative’ to ‘neutral’. This aggressive frontloading of monetary easing indicates a clear prioritization of growth support amid a benign inflation environment. The decision saw 5 out of 6 MPC members voting in favors of a 50bps cut, with one opting for a more conservative 25bps reduction.
Adding to the surprise, the RBI also reduced the Cash Reserve Ratio (CRR) by 100bps, to be implemented in four equal tranches of 25bps each starting from September 6, 2025, followed by tranches on October 4, November 1, and November 29. This move is expected to infuse approximately ₹2.5 trillion of additional liquidity into the banking system by December 2025.
RBI’s Evolving Policy Strategy
The RBI acknowledged that with this round of policy easing, it has now delivered a cumulative 100bps cut in the repo rate since February 2025. However, it noted that “monetary policy is left with very limited space to support growth” in the current context, signaling a possible pause in further easing while it evaluates the impact of recent measures.
The change in stance to ‘neutral’ provides the central bank with operational flexibility to move in either direction in response to evolving macroeconomic data, particularly the inflation-growth balance.
Growth Outlook: Mixed Global Signals, Steady Domestic Momentum
The RBI retained its FY26 GDP growth forecast at 6.5%, reflecting confidence in India’s domestic resilience. The quarterly growth estimates are as follows:
Q1 FY26 (Apr–Jun): 6.5%
Q2 FY26 (Jul–Sep): 6.7%
Q3 FY26 (Oct–Dec): 6.6%
Q4 FY26 (Jan–Mar): 6.3%
Growth is being driven by robust rural demand, thanks to a strong rabi harvest and positive monsoon expectations, as well as urban demand supported by ongoing strength in the services sector. However, the central bank flagged key risks, including geopolitical tensions, trade-related uncertainties, and weather anomalies that could affect the overall outlook.
Inflation Outlook: Comfortably Within Target
The RBI noted that CPI inflation has been moderating, supported by falling food prices and steady core inflation. The CPI inflation projections for FY26 have been revised downward by 30bps to 3.7%, suggesting that inflation is not only aligned with the 4% target but may undershoot it marginally.
Quarterly CPI projections are as follows:
Q1 FY26: 3.6%
Q2 FY26: 3.9%
Q3 FY26: 3.8%
Q4 FY26: 4.0%
The benign outlook is further reinforced by expectations of a normal monsoon and strong kharif output, which should help keep food inflation in check.
Bond Market Reaction and Investment Outlook
The bond market reacted positively to the policy decision, particularly at the shorter end of the yield curve. Yields rallied by 5–8bps up to the 5-year tenor, while the longer end saw a modest sell-off of 3–6bps.
Given the RBI’s dovish tone and abundant liquidity, the medium-term outlook for fixed income remains constructive:
Inflation is well below the 4% target, supporting stable-to-lower yields.
Liquidity will remain in surplus due to CRR cuts and earlier rate actions.
The external environment remains favorable, aided by steady services exports, lower crude oil prices, and healthy forex reserves.
The government’s commitment to fiscal consolidation bodes well for managing G-Sec supply.
Recommended Investment Strategies
In the current environment, investors could consider the following strategies:
Medium-duration funds (up to 5 years), particularly corporate bond-focused schemes, to benefit from falling yields and stable spreads.
Long-duration funds may also be attractive, especially given the widening spreads over 10-year G-Secs. These are suitable for investors with a longer investment horizon and higher risk tolerance.
Conclusion
The RBI’s decision to aggressively cut the policy repo rate and CRR underscores its commitment to nurturing economic growth while keeping inflation in check. By frontloading its monetary actions, the central bank has aimed to dispel any ambiguity and provide a clear signal to markets. With the shift to a neutral stance, the RBI has also reserved the flexibility to recalibrate policy in either direction based on data.
