India’s monetary policymakers used a benign inflation outlook to frontload rate cuts and send a ‘clear signal’ to productive sectors to boost growth, showed the Minutes of the June 6 meeting that slashed benchmark rates by an outsized half a percentage point. A bigger reduction would also quicken transmission, argued those in favour.
“Given the sharp reduction in inflation over the past few months and the projected reduction in annual average inflation…, it is expected that the front-loaded rate action along with certainty on the liquidity front would send a clear signal to the economic agents, thereby supporting consumption and investment through lower cost of borrowing,” central bank governor Sanjay Malhotra was cited as saying in the Minutes of the Monetary Policy Committee (MPC) published Friday.
On June 6, the Reserve Bank of India (RBI) lowered the benchmark repo rate by an unexpected 50 basis points to 5.5% and changed the policy stance to “neutral” from “accommodative”, going by the majority vote of the MPC.
One basis point is a hundredth of a percentage point.
"Overall, while a case can be made for two consecutive rate cuts of 25 bps each in this as well as the next policy cycle, there is also merit in front-loading these cuts. Therefore, I vote for a policy rate cut by 50 bps in this meeting" said Poonam Gupta, deputy governor in her first MPC vote, " This should help in fostering policy certainty and faster transmission than a staggered rate cut, and in more effectively countering the challenges emanating from the global economy".
Rajiv Ranjan, an internal member on the rate-setting panel, was of the opinion that since monetary policy worked with a lag, under the current circumstances, a 50-bps cut was preferable to two 25-bps cuts for faster transmission.
“Similar to the frontloaded rate hikes during the tightening cycle, frontloading rate cuts could help in hastening transmission by providing decisive signals and confidence to the stakeholders” Ranjan said.
The inflation outlook is 3.7% for FY26, lower than the 4% mandated target. The GDP is forecast at 6.5% for the year. In May, the headline consumer price gauge was 2.82%.
'Liquidity Outweighs Rates'
Saugata Bhattacharya, who had split ranks with panel members on the quantum of the reduction, voted for a 25-bps rate cut, arguing that boosting durable liquidity would be more impactful on transmission than a steeper reduction in policy rates.
“The RBI’s liquidity infusion and other measures have played a key role in this process, partly via lower money market and short-term interest rates, reducing the overall banks’ cost of funds,” Bhattacharya, an external member, was cited as saying. “The RBI data suggests that Rs 9.5 lakh crores of durable liquidity was injected into the banking system since January. In this context, I believe the RBI’s assurance of continuing large durable liquidity support is likely to have a more dominant effect on further transmission compared to a deep cut in the repo rate.”
The RBI’s cumulative 100 bps cuts since February come amidst private investment, especially in manufacturing, and urban consumption, remaining subdued. Additionally, the uncertain external environment has complicated the economic growth outlook for 2025-26, especially due to political tensions and trade war which has impacted job creation.
“A heavier-than-expected cut in policy rate (along with the possible fiscal policy support) would send a clear message that India is serious about supporting economic growth momentum and would spare no effort in terms of policy interventions” said external member Nagesh Kumar, director and chief executive, Institute for Studies in Industrial Development. “A double dose of rate cut is likely to bring down lending rates significantly, helping to spur the investment and consumption of durable goods.”
Decision Dilemma
Expectations of further rate cuts have likely delayed the materialisation of demand and investment decisions.
“In such an environment, given the market expectation of a 50-bps rate cut in this cycle, a staggered rate cut can further delay the materialisation of demand and investment decisions,” said external member Ram Singh, Director, Delhi School of Economics. “By contrast, a front-loaded 50-bps cut in the policy rate is likely to help achieve the twin objectives of supporting demand and growth by reducing the cost of funds for borrowers”.
One of the concerns raised was the interest rate differential between India policy rates and the US Fed rates, which could lead to capital flight and can put pressure on the rupee.
“However, given the robust fundamentals of the Indian economy, including a comfortable current account situation, any pressure on INR is likely to be confined to the short run,” Ram Singh said.
“Given the sharp reduction in inflation over the past few months and the projected reduction in annual average inflation…, it is expected that the front-loaded rate action along with certainty on the liquidity front would send a clear signal to the economic agents, thereby supporting consumption and investment through lower cost of borrowing,” central bank governor Sanjay Malhotra was cited as saying in the Minutes of the Monetary Policy Committee (MPC) published Friday.
On June 6, the Reserve Bank of India (RBI) lowered the benchmark repo rate by an unexpected 50 basis points to 5.5% and changed the policy stance to “neutral” from “accommodative”, going by the majority vote of the MPC.
One basis point is a hundredth of a percentage point.
"Overall, while a case can be made for two consecutive rate cuts of 25 bps each in this as well as the next policy cycle, there is also merit in front-loading these cuts. Therefore, I vote for a policy rate cut by 50 bps in this meeting" said Poonam Gupta, deputy governor in her first MPC vote, " This should help in fostering policy certainty and faster transmission than a staggered rate cut, and in more effectively countering the challenges emanating from the global economy".
Rajiv Ranjan, an internal member on the rate-setting panel, was of the opinion that since monetary policy worked with a lag, under the current circumstances, a 50-bps cut was preferable to two 25-bps cuts for faster transmission.
“Similar to the frontloaded rate hikes during the tightening cycle, frontloading rate cuts could help in hastening transmission by providing decisive signals and confidence to the stakeholders” Ranjan said.
The inflation outlook is 3.7% for FY26, lower than the 4% mandated target. The GDP is forecast at 6.5% for the year. In May, the headline consumer price gauge was 2.82%.
'Liquidity Outweighs Rates'
Saugata Bhattacharya, who had split ranks with panel members on the quantum of the reduction, voted for a 25-bps rate cut, arguing that boosting durable liquidity would be more impactful on transmission than a steeper reduction in policy rates.
“The RBI’s liquidity infusion and other measures have played a key role in this process, partly via lower money market and short-term interest rates, reducing the overall banks’ cost of funds,” Bhattacharya, an external member, was cited as saying. “The RBI data suggests that Rs 9.5 lakh crores of durable liquidity was injected into the banking system since January. In this context, I believe the RBI’s assurance of continuing large durable liquidity support is likely to have a more dominant effect on further transmission compared to a deep cut in the repo rate.”
The RBI’s cumulative 100 bps cuts since February come amidst private investment, especially in manufacturing, and urban consumption, remaining subdued. Additionally, the uncertain external environment has complicated the economic growth outlook for 2025-26, especially due to political tensions and trade war which has impacted job creation.
“A heavier-than-expected cut in policy rate (along with the possible fiscal policy support) would send a clear message that India is serious about supporting economic growth momentum and would spare no effort in terms of policy interventions” said external member Nagesh Kumar, director and chief executive, Institute for Studies in Industrial Development. “A double dose of rate cut is likely to bring down lending rates significantly, helping to spur the investment and consumption of durable goods.”
Decision Dilemma
Expectations of further rate cuts have likely delayed the materialisation of demand and investment decisions.
“In such an environment, given the market expectation of a 50-bps rate cut in this cycle, a staggered rate cut can further delay the materialisation of demand and investment decisions,” said external member Ram Singh, Director, Delhi School of Economics. “By contrast, a front-loaded 50-bps cut in the policy rate is likely to help achieve the twin objectives of supporting demand and growth by reducing the cost of funds for borrowers”.
One of the concerns raised was the interest rate differential between India policy rates and the US Fed rates, which could lead to capital flight and can put pressure on the rupee.
“However, given the robust fundamentals of the Indian economy, including a comfortable current account situation, any pressure on INR is likely to be confined to the short run,” Ram Singh said.
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