Mumbai | Home, auto and other loans are likely to cost less as the Reserve Bank of India (RBI) cut interest rates by a larger-than-expected 50 basis points on Friday, and unexpectedly reduced the cash reserve ratio for banks to make available more money to lend in a bid to boost the economy.
The RBI's six-member monetary policy committee, headed by Governor Sanjay Malhotra and consisting of three external members, voted five to one to lower the benchmark repurchase or repo rate by 50 basis points to 5.5 per cent. It also cut the cash reserve ratio by 100 basis points to 3 per cent, adding Rs 2.5 lakh crore to already surplus liquidity in the banking system.
With the latest reduction, the RBI has now cut interest rates by a total of 100 basis points in 2025, starting with a quarter-point reduction in February - the first cut since May 2020 - and another similar-sized cut in April.
The central bank, at the same time, changed its monetary policy stance from 'accommodative' to 'neutral' which means rates could increase or decrease in future depending on incoming data, with Malhotra stating that it may have limited space for further easing.
The repo rate is the rate at which the RBI lends money to banks to meet their short-term funding needs. With the latest cut in the repo rate, all External Benchmark Lending Rates (EBLR) linked to it will come down. And if the banks fully pass on this to the borrowers, equated monthly instalments (EMIs) on home, auto and personal loans will decline by 50 bps.
RBI, Malhotra said, expects lenders to pass on lower borrowing costs to consumers and boost credit growth with the additional cash they would have following the cut in cash reserve ratio by 100 basis points to 3 per cent.
The cut in CRR will take effect in four stages between September and December.
"Today's monetary policy actions should be seen as a step towards propelling growth to a higher aspirational trajectory," he said, adding the aspiration is for growth of between 7 per cent and 8 per cent.
Giving rationale for the decision, the RBI Governor said inflation or price rise has softened significantly over the last six months from above the tolerance band in October 2024 to well below the target, with signs of a broad-based moderation.
Growth, on the other hand, remains lower than aspiration amid a challenging global environment and heightened uncertainty.
"Thus, it is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum," he said. "This changed growth-inflation dynamics calls for not only continuing with the policy easing but also frontloading the rate cuts to support growth." The rate cut comes as the Indian economy slowed to a four-year low of 6.5 per cent in the fiscal year that ended March. RBI projected the economy to grow by the same measure in the current financial year that started on April 1 as rising trade tensions following US President Donald Trump's tariff policies provide headwinds.
The central bank lowered its inflation projection to 3.7 per cent for 2025-26 (FY26) from 4 per cent earlier.
"While price stability is a necessary condition, it is of course not sufficient to ensure growth," he said.
With consumer price inflation at 3.16 per cent in April - the lowest since July 2019 - and further expected to stay below the RBI's 4 per cent target (FY26 inflation now projected at 3.7 per cent), the RBI seems to have seized the opportunity to decisively pivot toward growth. The shift comes amid global trade uncertainties and subdued private capex.
Unlike previous disinflation episodes primarily driven by volatile food prices, the current moderation (inflation has remained below 4 per cent for three straight months) is broad-based across multiple segments of the consumer basket and may be an indication of a sustained structural easing in price pressures rather than a fleeting dip.
CRR cut will lead to an immediate injection of liquidity and reduce funding costs.
Lower home loan and construction finance rates will boost housing and infra momentum. Also, enhanced affordability is expected to revive mid and premium housing segments.
With funding costs dropping, the monetary easing is also being seen as a strong signal for industry to kickstart capex.
Bank loan growth dipped to 9.8 per cent in May 2025, reflecting a broad-based decline in lending in the economy, according to a report from the economic research division of the State Bank of India.
"Monetary policy is not a sufficient condition, but it is a necessary condition," Malhotra said, adding the central bank was confident its announcements would help boost lending.
The RBI, he said, remains committed to provide sufficient liquidity to the banking system.
"The cut in CRR would release primary liquidity of about Rs 2.5 lakh crore to the banking system by December 2025. Besides providing durable liquidity, it will reduce the cost of funding of the banks, thereby helping in monetary policy transmission to the credit market," he said.
Strong macroeconomic fundamentals and a benign inflation outlook provide space for monetary policy to support growth, while remaining consistent with the goal of price stability, he said.
"As the global environment remains uncertain, it has become even more important to focus on domestic growth amidst sustained price stability.
Accordingly, today's monetary policy actions should be seen as a step towards propelling growth to a higher aspirational trajectory," he added.
He hastened to add that there was "no tussle" between price stability and growth in the medium and long term. "Price stability preserves purchasing power, imparts certainty to households and businesses in their savings and investment decisions and ensures congenial interest rates and financial conditions, all of which foster consumption, investment and overall activity. Moreover, it is crucial for equitable growth and shared prosperity because its absence is disproportionately burdensome on the poor." While price stability is a necessary condition, it is not sufficient to ensure growth, he said, "A supportive policy environment is vital. This is even more important during periods of high uncertainties such as the current times." At the RBI, while price stability remains the focus of monetary policy, it is not oblivious to putting in place complementary monetary and credit policies and regulations that support growth and prosperity, he added.
While Radhika Rao, Senior Economist at DBS Bank, said further rate reductions are likely if the growth momentum weakens anew, Crisil said it expects one more rate cut this fiscal, and a hold thereafter.
Ranen Banerjee, Partner and Leader, Economic Advisory, PwC India, said the policy rate easing, combined with the liquidity increase for banks when system liquidity is already comfortable, is likely to add a second engine to the consumption growth flight that is anticipated to be already in flight from the income tax cuts taking effect in FY26. "This is significantly positive for urban consumption, which printed weak in past quarters, and will also likely add a fillip to real estate, discretionary purchases, and private capex." A healthy monsoon, coupled with low crude prices, is likely to keep inflation aligned to the RBI's 4 per cent target this fiscal, Crisil said, adding the rate cuts will be pivotal in supporting domestic growth this fiscal against external headwinds
