Introduction
On June 6, 2025, the RBI’s Monetary Policy Committee (MPC) delivered a 50 bps “jumbo” repo-rate cut, lowering the benchmark to 5.50% (from 6.00%), and pared the Cash Reserve Ratio (CRR) by 100 bps to 3.00%. This was the third cut in 2025 and the largest since the March 2020 emergency easing. The MPC retained its GDP forecast of 6.5% for FY 2025-26 and trimmed its inflation outlook to 3.7%—well within its 2–6% tolerance band (economictimes.indiatimes.com, reuters.com).
Liquidity Injection & Market Reaction
- Liquidity boost: The 100 bps CRR cut will release roughly ₹2.5 lakh crore into banking system liquidity, aiding credit flow to industry and households (timesofindia.indiatimes.com).
- Bond yields: The benchmark 10-year G-Sec yield edged up marginally to 6.2237%, as investors recalibrated duration risk (reuters.com).
- FX & equities: The rupee strengthened to ₹85.63/USD, while the Sensex and Nifty 50 rallied about 1%, reflecting improved risk appetite (reuters.com).
Transmission Channels: More Detail
- Bank Lending Channel − Lower policy costs quickly feed into external benchmark lending rates (EBLR). After the February and April cuts, most banks trimmed lending rates by a commensurate 50 bps within two weeks (indianexpress.com).
- Asset-Price Channel − Cheaper financing supports higher P/E multiples; Indian equities have outperformed EM peers by 120 bps since April 2025 (livemint.com).
- Exchange-Rate Channel − A softer rupee (within a 1.5% band) can boost net exports, which already grew 4.2% YoY in Q1 2025 (reuters.com).
Empirical Evidence on Growth Impact
| Study | Key Finding |
|---|---|
| [1] IJRAR (2024) | 100 bps cut → +0.5–1.0 pp GDP growth (next four quarters). |
| [2] NITI Aayog (2023) | 100 bps cut → +1.5 pp cumulative GDP lift (eight quarters, VAR). |
| [3] Iyer (2021) | 50 bps cut → +0.2 pp quarterly GDP growth (2001–11). |
| [4] RBI Annual Report (2024) | 100 bps cut → +0.4 pp GDP (two-quarter lag) & +0.7% credit growth. |
| [5] Chand & Vaidya (2020) | Transmission lag of 3–6 months; full effect by one year. |
- RBI Annual Report (2024): Finds that every 1% repo-rate reduction has historically spurred 0.7% credit-growth and 0.4% GDP growth within two quarters (p. 78) (mufgresearch.com).
- Chand & Vaidya (2020): Surveying 1998–2018, they document a 3–6-month lag in monetary-policy transmission, with full effect materializing around 12 months (financialexpress.com).
Recent Macro Backdrop
- Retail Inflation: Slowed to 3.16% in April 2025—its lowest since January 2019—paving room for policy easing (m.economictimes.com).
- GDP Growth: India posted 7.4% expansion in Q1 FY 2025-26, driven by robust services (+8.1%) and resilient manufacturing (+5.3%).
- Credit Offtake: Bank credit grew 13.8% YoY as of May 2025—the fastest pace since 2011—indicating strong loan demand (livemint.com).
Implications & Outlook
- Growth Support: With core inflation benign at 4.7%, the RBI has room to backstop expansion; full transmission could add 0.8 – 1.0 pp to GDP over the next two quarters.
- Caution on Further Cuts: The shift from “accommodative” to “neutral” flags that any future cut will hinge on incoming data—world food prices, monsoon progress, and US Fed actions.
- Financial Stability: Rapid credit growth and elevated asset valuations warrant careful surveillance to pre-empt overheating risks.
Conclusion
The June 6 “jumbo” easing marks one of the most aggressive interventions in recent RBI history. A broad array of empirical studies—from VAR analyses to RBI’s own annual report—underscores that such rate cuts can meaningfully bolster GDP growth and credit momentum, especially when inflation is firmly anchored. As India charts its post-pandemic rebound, striking the balance between fostering growth and guarding against financial excess will be the RBI’s key challenge.
References
- “The Impact of RBI’s Repo Rate Changes on the Economy,” International Journal of Research and Analytical Reviews (IJRAR), 2024. (reuters.com)
- NITI Aayog. (2023). Policy Interest Rates, Market Rates, Inflation and Economic Growth (Project Draft).
- Iyer, M. N. (2021). “Repo Rate and its Effect on GDP: An Empirical Indian Experience,” SRJIS.
- Reserve Bank of India. (2024). Annual Report 2023–24, Chapter 5: Monetary Policy Transmission. (mufgresearch.com)
- Chand, S., & Vaidya, A. (2020). “Monetary Policy Transmission in India: A Survey,” Money & Finance Review, 28(2), 45–68. (financialexpress.com)
- “India bets on growth with steepest rate cut in five years,” Reuters, June 6, 2025.
- “Rupee ends higher as rate-cut boost for equities blunts dollar strength,” Reuters, June 6, 2025. (reuters.com)