The Reserve Bank of India (RBI) surprised markets Friday by cutting the repo rate by 50 basis points (bps) to 5.5%. It also announced a 100-bps reduction in the Cash Reserve Ratio (CRR) in four stages, releasing around ₹2.5 lakh crore into the financial system.

This follows 25-bps rate cuts each in February and April; thus, taking the total repo rate reduction to 100 bps in 2025 so far. Coupled with a record ₹2.69-lakh crore dividend payout to the government, in addition to the ₹9.5 lakh crore in durable liquidity since January, these measures show an aggressive push to support the economy using both monetary (interest rates, liquidity) and fiscal (government spending) tools. It also signals the RBI’s strong confidence in India’s economic fundamentals and its commitment to promoting sustainable growth.

"The early rate cut, along with an inflation forecast under 4%, demonstrates trust in India's macroeconomic foundations and aligns with the requirement to boost demand in crucial sectors,” said Salee S. Nair, MD & CEO, Tamilnad Mercantile Bank. 

Lower interest rates mean cheaper loans for consumers and businesses, thus increasing spending and investment. Nair highlights how this policy could help small businesses and rural enterprises. "The reduced interest rate atmosphere offers essential relief to borrowers and will aid in capital expenditures and working capital requirements."

Additionally, the RBI’s phased CRR cut, which allows banks to keep less money with the central bank, gives lenders more liquidity to issue loans. "The RBI has effectively supported the banking system by extending support with a decision to reduce the Cash Reserve Ratio by 100 bps throughout the year. This will help banks to strengthen the liquidity within the system, continue to enable our customers with financial support," Nair added.

Experts highlight that the policy review has broadly addressed any concerns about a slowdown in growth on account of global uncertainties. It fully capitalised on the softening domestic inflation to deliver a frontloaded rate cut, staggered durable liquidity injection, and yet leaving room for future action. "The policy is definitely positive for all sectors of the economy, particularly for banking and finance. Lower cost of borrowing will act as a counterbalance to any uncertainty,” said C. S. Setty, chairman of SBI and Indian Banks' Association.

The macroeconomic environment is ripe for sustained growth, said Manish Kothari, group president and head-commercial banking, Kotak Mahindra Bank. "The shift to a neutral policy stance signals that while further rate cuts may be limited, the current policy remains sufficiently accommodative. As the governor rightly emphasised, price stability alone is not enough—a supportive policy framework is essential in uncertain times to nurture growth and build economic momentum.”

Growth powered by domestic demand

Despite a weak global environment, India has done well after Covid. According to D. K. Srivastava, chief policy advisor, EY India, “India’s GDP growth…has averaged 7.8% over 2022-23 to 2024-25, even as global growth stayed at just 3.5%.”

This growth was mainly driven by domestic demand, especially government spending on infrastructure, he explained, even as he pointed out that for long-term stability, private investments and exports must also pick up. “A more balanced profile of growth drivers would call for a tangible pickup in private investment demand and external demand. While much cannot be said about the way external demand might evolve, domestic private investment demand can be stimulated. In this context, monetary policy is of considerable importance since it affects the cost of capital.”

In short, the current rate cuts aim to reduce borrowing costs, helping private sector investments recover.

The room for more cuts narrows

Although the RBI has lowered interest rates aggressively this year, it has now shifted its policy stance from ‘accommodative’ to ‘neutral’, meaning future rate cuts may be more limited.

"Under the current circumstances, monetary policy is left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral," said the RBI Governor.

While Srivastava welcomed the frontloading of policy rate reduction, he signaled that the RBI may carry forward the momentum of the present interest rate reduction cycle at least until the policy rate reaches 5% amid the likely global growth slowdown and trade-related uncertainties.

Chanchal Agarwal, CIO, Equirus Credence Family Office, noted, "The move aims to support growth amid declining inflation projections and weak private capex, but it also underscores constrained room for further cuts in the near term. While positive for credit growth and capex revival, the move could compress banking Net Interest Margins (NIMs) in the near term." 

Market reaction and inflation outlook

Mahendra Jajoo, CIO-fixed income at Mirae Asset Investment Managers, expects longer bond yields to remain range-bound and the money market rates to ease further. "The 10Y benchmark bond yield, which has already inched down to around 6.20%, remained largely flat. Most reaction was seen in the shorter end of the curve, with money market rates easing further, extending to the 1-3-year corporate bond segment,” he said.

However, Agarwal expects the yield curve to steepen as short-term rates fall more than long-term rates, which could benefit bonds with 4-5-year maturities.

Meanwhile, as inflation remains under control, the RBI has revised its consumer price inflation (CPI) forecast for 2025-26 down to 3.7% from 4% earlier, giving it more space to ease policy without worrying about price spikes. “As private investment keeps improving, the ongoing rate reduction cycle could incentivise private investment and take India’s potential growth closer to 7% in the next few years,” Srivastava said.

TRUST Mutual Fund CEO Sandeep Bagla echoed similar views. "These measures came as a positive surprise to equity markets as there will be greater impetus to growth and there could be a faster pick-up in the interest rate sectors."

Gold outlook benefits from stable macro backdrop

Colin Shah, MD, Kama Jewellery, said the gold prices have been volatile in domestic and international markets due to macro headwinds. “With the U.S. Fed’s decision due in the second half of this month, we will have to wait and watch what unfolds, as that will decide the course of gold prices globally. As we step into the gold-buying season, this will augur well for the domestic gems & jewellery sector as a softened inflation will reflect as strengthened purchasing power among the masses, thus reinforcing the buying of jewellery.”

Global outlook: Optimism and uncertainty co-exist

There is cautious optimism globally, but risks remain. "The uncertainty around the global economic outlook has ebbed somewhat since the MPC met in April in the wake of a temporary tariff reprieve and optimism around trade negotiations. However, it continues to remain elevated to weaken sentiments and lowering global growth prospects. Accordingly, global growth and trade projections have been revised downwards by multilateral agencies. Market volatility has eased in the recent period with equity markets staging a recovery, dollar index and crude oil softening, though gold prices remain high," according to policy documents.

A senior economist seeking anonymity said, "The global economy is not in the clear yet. Trade tensions, commodity swings, and geopolitical instability continue to weigh on business confidence and recovery.”

Outlook: Domestic demand to drive future growth

Going forward, economic activity continues to maintain the momentum in 2025-26, supported by private consumption and fixed capital formation. A steady rural economy, combined with the expanding services sector, is expected to boost both rural and urban demand.

Investment activity is picking up, supported by higher capacity use, stronger corporate balance sheets, and continued government spending. While trade policy uncertainty still affects merchandise exports, deals like the U.K. FTA offer hope for a pickup in trade.

On the supply side, a favourable monsoon forecast, and healthy allied sectors are good news for agriculture. The services sector, which has held steady through various cycles, is expected to remain strong. Still, risks remain due to geopolitical tensions, global trade friction, and weather-related shocks, the RBI warned.

Vinod Francis, GM & CFO, South Indian Bank, summed it up, " The key learning from the policy is that the central bank is not leaving any stones unturned to ensure price stability. At the same time, (it’s) doing everything it takes to support growth.  With tariff uncertainty casting a long shadow over external demand (exports), RBI’s sharp focus on supporting domestic demand and enhancing the lending power of the banking sector underpins its policy path during the current easing cycle by addressing key concerns on both demand and supply sides."

With stable inflation and relatively contained fiscal risks, the macroeconomic backdrop allows room for policy continuity. As Shishir Baijal, Chairman and Managing Director, Knight Frank India, puts it: "As interest rates decline and disposable incomes gradually rise, we expect a broader revival in consumption, of which housing is a cornerstone. A coordinated push from policymakers, lenders, and developers can help ensure that the benefits of this rate cycle reach the households that need it the most.”