RBI cuts repo rate by 50 bps to 5.50%, changes policy stance to ‘neutral’; CRR reduced by 100 bps

The Reserve Bank of India (RBI) on Friday delivered surprises on two fronts in its second bi-monthly monetary policy of FY26. The RBI Governor Sanjay Malhotra-led Monetary Policy Committee (MPC) decided to cut the repo rate by 50 basis points (bps) to 5.50% from 6.00% earlier. This is the central bank’s third consecutive repo rate cut.

While it lowered the repo rate by 50 basis points (bps), the third cut in a row, front-loading them on the back of softening inflation, it also went for a 100 bps cut in the cash reserve ratio (CRR).

The MPC also decided to change the policy stance to ‘Neutral’ from ‘Accommodative’, RBI Governor Sanjay Malhotra announced in his monetary policy speech.

The MPC said that after having reduced the policy repo rate by 100 bps in quick succession since February 2025, under the current circumstances, monetary policy is left with very limited space to support growth.

Track latest developments from RBI policy here

CRR cut by 100 basis points

RBI said that the 100 basis points reduction in CRR — funds banks need to set aside with RBI — would happen over four tranches, taking it to 3%.

Malhotra said the MPC decided to cut the Cash Reserve Ratio (CRR) by 100 basis points (bps) to 3% from 4% earlier in four tranches of 25 bps each starting from September 6, October 4, November 1 and November 29 this year.

Governor Sanjay Malhotra said this CRR cut would release liquidity of ₹2.5 trillion and make for quicker transmission of cuts in repo rates to lower lending rates. To be sure, the banking system is already in a surplus mode after RBI infused durable liquidity of ₹9.5 trillion since January. According to a report by IDFC First Bank on 3 June, the liquidity surplus improved to ₹1.7 trillion in May 2025, and is expected to rise to ₹5 trillion by August 2025, as government expenditure rises.

“From here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance,” the MPC said.

“The fast-changing global economic situation too necessitates continuous monitoring and assessment of the evolving macroeconomic outlook.”

In its April monetary policy meeting, RBI had reduced the repo rate by 25 bps and also shifted the policy stance to ‘accommodative’ from ‘neutral’.

RBI maintained GDP forecast for FY26 at 6.5%. GDP estimates for Q1FY26 is at 6.5%, Q2FY26 at 6.7%, Q3FY26 at 6.6% and Q4FY26 is at 6.3%.

Inflation Forecasts for FY26

CPI inflation forecast for FY26 has been reduced to 3.7% from 4% earlier. Q1FY26 CPI inflation is projected at 2.9% from 3.6% earlier, while projections for Q2FY26 has been cut to 3.4% from 3.9%, Q3FY26 raised to 3.9% from 3.8% and Q4FY26 has been maintained at 4.4%.

The rate cut of 50 bps was quite unexpected. Of 15 economists and treasury heads polled by Mint last week, 14 said the central bank’s rate-setting panel will unanimously vote for a 25 basis points repo rate cut to 5.75%, keeping the policy stance unchanged at accommodative. However, State Bank of India’s chief economic advisor Soumya Kanti Ghosh had said he expected the MPC to go for a sharper cut of 50 bps.

The cut comes at a time India’s inflation measured by the consumer price index eased in April to its slowest pace in over six years on the back of lower food prices. Retail inflation rose 3.16% year-on-year in April, down from 3.34% in March, 3.61% in February, and 4.83% in the same month last year, according to data from the ministry of statistics and programme implementation.

The central bank on Friday revised its inflation estimate for FY26 to 3.7%. The inflation outlook for the year is being revised downwards from the earlier forecast of 4% to 3.7%, it said.

Indian Economy Growth Forecast

Meanwhile, the Indian economy is estimated to have grown 7.4% in the three months through March and 6.5% for the full financial year 2024-25. Mint reported on 30 May that both March quarter and FY25 figures were lower than 8.4% in Q4 of FY24 and 9.2% (revised) in full FY24. In April RBI had projected GDP growth for 2025-26 at 6.5%, with Q1 at 6.5%; Q2 at 6.7%; Q3 at 6.6%; and Q4 at 6.3%.

On Friday, the MPC said that growth remains lower than its aspirations amidst 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,” it said.