In its first Monetary Policy Committee (MPC) meeting of FY26 on April 9, 2025, the Reserve Bank of India (RBI) unanimously cut the repo rate by 25 basis points to 6.00% and adjusted the Standing Deposit Facility (SDF) rate to 5.75% and the Marginal Standing Facility (MSF) rate to 6.25%. The central bank also shifted its policy stance from “neutral” to “accommodative,” signalling more room for easing.
Against a backdrop of US tariff threats, a weakening dollar, and global market sell-offs, the RBI pared its FY26 GDP growth forecast to 6.5% and trimmed inflation projections to 4.0%. Liquidity injections totalling roughly ₹6.9 lakh crore helped the system move from a ₹3.1 lakh crore deficit in January to a surplus by late March. Despite a recovery in core sectors—electricity up 6.2%, cement up 11.6%, and steel up 7.1% in March—industrial output decelerated to 2.9% growth in February.
Source: Reserve Bank of India
I investigate the “why” behind the RBI’s bold move, the potential risks it may be glossing over, and the real-world impact on businesses and households.
In Focus: Key Policy Decisions
- Repo Rate Cut: Reduced by 25 bps to 6.00% from 6.25%, the second consecutive cut this year.
- SDF & MSF Rates: SDF lowered to 5.75%; MSF adjusted to 6.25%.
- Policy Stance: Shifted from “neutral” to “accommodative,” signalling only two future options: status quo or further cuts.
- Growth & Inflation Forecasts: FY26 GDP projection trimmed to 6.5% (from 6.7%); inflation projection eased to 4.0% (from 4.2%).
Global Headwinds and Domestic Signals
US Tariffs and Trade Uncertainty
The timing of the cut came amid fresh US tariff impositions on Chinese goods, stoking fears of retaliatory measures and disrupting global supply chains. The RBI Governor explicitly cited trade protectionism and “currency wars” as growth-dragging factors.
Currency and Equity Volatility
Between late March and early April, the rupee faced downward pressure while the US dollar index dipped. Concurrently, Indian equity benchmarks lost ground: the Nifty 50 slid by 0.72%, and the Sensex by 0.58% on April 9, despite the rate cut.
Why the Cut? Unpacking the Rationale
- Inflation Comfort Zone: Recent data showed consumer inflation near a six-year low: just 3.27% in April, below the RBI’s 4% target for the third straight month. Food inflation has eased on a record wheat and pulses harvest and robust kharif arrivals.
- Oil Price Relief: Crude prices have softened from early 2025 highs, easing input costs for transportation and manufacturing. Lower global energy costs give the RBI latitude to focus on growth.
- Growth Concerns: With global headwinds and weaker domestic demand, the RBI pulled down its FY26 growth forecast by 20 bps to 6.5%. Bespoke data on core sector output shows pockets of strength but also mixed signals: electricity output rose 6.2% in March, cement 11.6%, steel 7.1%, yet petroleum contracted.
- Liquidity Normalisation: A deficit peaking at ₹3.1 lakh crore on January 23 under LAF prompted the RBI to inject about ₹6.9 lakh crore through various operations. By March 29, the system was in surplus, and the Weighted Average Call Rate (WACR) hovered near the repo rate.
Tough Questions They Didn’t Tell You
Is the RBI Over-prioritising Growth? - With inflation comfortably below target, is the RBI risking future price spikes by cutting rates? Or is it simply reflecting a delicate balance in an uncertain global environment?
Weather and Monsoon Dependence: The RBI’s projections assume a normal monsoon. What if monsoon rains falter? Could a sudden spike in food prices force a U-turn?
Asset Bubbles and Household Debt: Lower borrowing costs may fuel stock and real estate speculation. Is the RBI vigilant enough to guard against systemic risks from exuberant credit growth?
How resilient is India to a potential escalation in US-China trade tensions? Could a deepening global slowdown undermine the RBI’s growth boost?
Economic Context: Core Sectors & Industrial Output
Core Sector Performance
In March, the combined Index of Eight Core Industries grew 3.8% year-on-year, propelled by electricity (+6.2%), cement (+11.6%), and steel (+7.1%). Yet, crude oil and natural gas output contracted by 1.9% and 12.7%, respectively, signaling uneven sectoral momentum.
IIP and Manufacturing Slowdown
Industrial output in February clocked its weakest six-month growth at just 2.9%, dragged down by manufacturing (+2.9%) and mining (+1.6%), even as electricity generation managed +3.6%. The deceleration across categories underlines domestic demand challenges and external vulnerabilities.
India’s Industrial Growth
Implications and Repercussions
- Borrowing Costs for Businesses & Consumers: Corporate loan rates and home loan EMIs could edge lower, offering relief to borrowers but potentially squeezing bank margins if deposit rates lag.
- Market Sentiment: Equity investors had largely priced in the cut; however, clarity on future cuts and global liquidity conditions will drive near-term market swings.
- Rupee Trajectory: An accommodative stance may weigh on the rupee if it prompts rate differentials with the US Federal Reserve, risking imported inflation.
- Banking Sector P&L: Banks’ Net Interest Margins (NIMs) could compress, raising the question of pass-through speed vs. profitability.
- Fiscal-Monetary Synergy: Government spending in late March added liquidity and boosted growth signals. Will fiscal prudence persist post-elections to support sustainable recovery?
What Next?
- Next MPC Meet (June 2025): With data flows on monsoon forecasts, CPI for May, and global trade tensions, the RBI’s June stance will be critical. Will it hold or cut further?
- Global Risks: Developments in the US-China tariff saga, crude oil price rebounds, or a sharper Fed tightening cycle could constrain India’s policy freedom.
- Domestic Wellsprings: Private investment intentions and consumption trends as recorded in upcoming Q1 industrial and CPI data will test the efficacy of this rate cut.
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