Repo Cuts, Liquidity Surge

The RBI’s bold policy pivot delivers liquidity, confidence and a nudge toward Viksit Bharat.

For the third consecutive week, the Reserve Bank of India (RBI) has dominated the headlines. It first released a record surplus transfer to the government, then followed up with a strong annual report despite global uncertainties. Most recently, the RBI, in its Monetary Policy Committee (MPC) meeting, surprised analysts with a sharp 50-basis-point cut in the repo rate and an even more significant 100-basis-point reduction in the Cash Reserve Ratio (CRR). Much like a perfectly timed cover drive by Virat Kohli, these moves are precise, strategic, and reinforce India's economic resilience.

The MPC was established under the Finance Act of 2016, replacing the earlier system where the RBI Governor solely made policy decisions. It consists of six members—three from the RBI, including the Governor as chairperson, and three appointed by the government. Its main role is to keep inflation within the target range of 4 percent, with a 2 percent tolerance in either direction. Decisions are made by majority vote, with the latest one passed by a 5:1 majority.

The MPC uses key policy tools like the repo rate and CRR to manage inflation and support economic growth. The repo rate is the RBI’s lending rate to commercial banks and serves as the benchmark for interest rates across banks and NBFCs. The CRR is the portion of demand and time liabilities that banks are required to maintain with the RBI. By adjusting these levers, the MPC regulates liquidity in the financial system, promoting long-term economic expansion.

The 50-basis-point repo rate cut signals policy decisiveness over gradualism, aiming to boost monetary transmission and market confidence. A phased 100-basis-point CRR cut from September 6, 2025, will release Rs. 2.5 trillion, adding to the Rs. 7.4 trillion already infused this year. Together, these steps underscore the RBI’s push to sustain credit flow and economic growth. Lower rates reduce lending costs, lift bond markets, and ease borrowing for businesses and governments—key levers the RBI is banking on to drive consumption and investment.

Since adopting inflation targeting in 2016, the MPC has consistently ensured price stability through timely interventions. Encouraged by the rebound in economic momentum in H2 FY25 and normal monsoon expectations, the RBI revised its FY26 inflation forecast down to 3.7 percent from 4 percent, citing subdued food prices and stable core inflation. April 2025 inflation stood at 3.2 percent, the lower end of the tolerance band, allowing room for rate easing to boost GDP growth without breaching the inflation threshold.

The MPC’s measures aim to sharply cut borrowing costs, making loans more affordable across sectors. With the repo rate at 5.50 percent, home, auto, personal, and corporate loan rates are set to fall, spurring credit demand, investment, and consumption. Rate-sensitive sectors like real estate, automobiles, and consumer durables stand to gain, especially in mid- and affordable housing.

The phased 100-basis-point CRR cut will inject Rs. 2.5 trillion into the system, boosting banks’ lending capacity and easing funding costs—particularly aiding MSMEs and businesses with floating-rate loans. Lower interest costs improve profitability and global competitiveness.

While these steps bolster investor and business confidence, they may reduce Fixed Deposit returns, pushing savers toward riskier assets like mutual funds and equities. This is a boon for markets, but a concern for risk-averse retirees.

Uncertainty over the US Federal Reserve's stance may impact the rupee-dollar exchange rate. A weaker rupee could drive up crude oil import costs, feeding into inflation. However, with record-high forex reserves, the RBI is well-equipped to intervene in the currency markets and contain inflationary risks.

Increased liquidity may raise demand and inflationary pressures. Yet, despite Rs. 7.4 trillion being injected since January 2025, April inflation remains at historic lows. The RBI’s phased CRR cut ensures a controlled liquidity flow, avoiding sudden spikes and preserving macroeconomic stability.

The RBI has shifted its policy stance from ‘Accommodative’ to ‘Neutral,’ signalling greater flexibility in response to economic changes. The Governor has assured that incoming data will be closely monitored, with timely interventions as needed. While maintaining an optimistic outlook on India’s prospects, the RBI remains committed to agility and vigilance.

The full impact of these policy measures will take time to play out, but the RBI remains confident in its 6.5 percent GDP growth projection. Should conditions align, further moves toward a 7 percent growth trajectory could follow. The central bank’s proactive approach remains a cornerstone of India’s march toward the Viksit Bharat vision.

(The writer is a Chartered Accountant with a leading company in Mumbai. Views personal.)