Falling inflation, uneven growth led to RBI front-loading rate cut, show Monetary Policy Committee minutes

MUMBAI: The unconventional 50 bps repo rate cut, taking the key rate to a low of 5.5%, along with a 100 bps reduction in the cash reserve ratio in a staggered manner announced on June 6 are part of the central bank’s efforts to prop up growth, which has lost some of its momentum due to the ongoing trade war concerns. The cut was also enabled by the six-member Monetary Policy Committee’s unanimous benign outlook on inflation, given the falling food prices and the forecast for a normal monsoon season, show the minutes of the June 4-6 meeting of the panel, released by the RBI on Friday.

In a surprise move, the MPC slashed the key repo by 50 bps—the only time it had done such a move in recent years was the 75 bps reduction in May 2020 in the middle of the pandemic—and also slashed the CRR to 3%. The package is aimed at offering stability in volatile global conditions and aid the country’s growth momentum in the near term. The MPC also changed the stance to neutral from accommodative, which was announced in the April policy.

The jumbo rate cut came after two successive rate cuts of 25 bps each in February and April.

“This package of measures will provide some certainty in the times of uncertainty and is expected to support growth,” said governor Sanjay Malhotra, according to the MPC minutes. Since the past three reviews, the rates are down a full 100 bps.

Inflation has cooled faster than expected, with the April consumer price index print falling to a near six-year low of 3.2%, giving the central bank space to act. That the May CPI print has fallen to a 76-month low of 2.82% is another reason for cheering the RBI forecast.

While headline inflation is expected to undershoot the RBI’s 4% target and average 3.7% in FY26—down from 4% earlier, growth remains below the aspirational levels—a reason why the MPC has not changed its GDP forecast for the year.

“While growth remains steady, it is lower than our aspirations,” Malhotra said. GDP grew 6.5% in FY25, with a strong 7.4% showing in the March quarter.

“Since the April policy, the incoming data point to more than anticipated softening of inflation. The Reserve Bank’s anti-inflationary policy stance in the last two years, supply side measures by the government and a good agricultural season seem to have helped gain control over inflation. This has given flexibility and opportunity for monetary policy to support growth,” the member from the RBI side Rajiv Ranjan said.

The youngest deputy governor Poonam Gupta, who is also in charge of the monetary policy department, not only backed a rate cut but batted for front loading it, saying, “There is also merit in front-loading these cuts, as given the positive data prints, the issue arises of how much support can be provided, and at what pace.”