RBI cuts repo rate by 50 basis points to 5.5 pc

Mumbai: RBI Governor on Friday Sanjay Malhotra announced a significant 50 basis point cut in the repo rate, reducing it from 6 per cent to 5.5 per cent to stimulate economic growth, as inflation has fallen below the lower RBI threshold of 4 per cent.

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.

The central bank, at the same time, changed its monetary policy stance to "neutral" from accommodative, with Malhotra saying further action will depend on incoming data.

Additionally, the Governor unveiled a 100 basis point reduction in the Cash Reserve Ratio (CRR), to be implemented in four equal tranches of 25 basis points on September 6, October 4, November 1, and November 29. This move is expected to inject ₹2.5 lakh crore into the banking system, enhancing liquidity and facilitating credit flow.

A lower policy rate leads to a decline in interest rates on bank loans, making borrowing more accessible for both consumers and businesses. This, in turn, promotes higher consumption and investment, driving economic growth.

The effectiveness of the rate cut will largely depend on how swiftly and efficiently commercial banks transfer the benefits to borrowers.

RBI Governor Sanjay Malhotra stated that the repo rate has now been reduced by 100 basis points in rapid succession since February, prompting a shift in the monetary policy stance from accommodative to neutral. This adjustment allows the RBI to closely monitor the balance between economic growth and inflation.

Malhotra highlighted that the inflation rate has declined to 3.2 per cent due to a broad-based moderation in prices, ensuring a durable alignment within the RBI’s target range. As a result, the RBI has revised its inflation projection downward from 4 per cent to 3.7 per cent.

The governor emphasised that India remains the fastest-growing economy, with strong balance sheets across corporates, banks, and the government, alongside a stable external sector—underscoring the country’s robust economic fundamentals. He noted that India's economy continues to offer attractive investment opportunities for both domestic and foreign investors.

The uncertainties regarding rabi crops have abated considerably, and the second advance estimates point to a record wheat production and higher production of key pulses over the last year. Robust kharif arrivals are also expected to set the stage for a durable softening of food inflation.

According to the RBI, the sharp decline in inflation expectations would also help anchor inflation expectations going ahead. Furthermore, the fall in crude oil prices augurs well for the inflation outlook.

The governor said that the Indian economy offers immense opportunities to investors on the back of demography, digitalisation, and domestic demand.

(with agency inputs)