The Monetary Policy Committee (MPC) of the RBI announced a 50-bps cut in the repo rate to 5.50%, exceeding the market consensus expectation of a 25-bps cut. This was accompanied by a shift in the monetary policy stance to ‘neutral’ from ‘accommodative’ earlier – this too came as a completely unanticipated move. While the decision on interest rate cut was backed by majority voting of 5-1 (with one of the external members, Mr. Saugata Bhattacharya, opting for a 25 bps cut instead), the one on shift in policy stance saw unanimous support from within the MPC.

In addition to the announcements on monetary policy, the RBI also announced a 100-bps reduction in the CRR to 3.00%. The relaxation in reserve requirement will be carried out in four equal tranches of 25 bps each with effect from the fortnights beginning September 6, October 4, November 1 and November 29, 2025. On a cumulative basis, this will infuse primary liquidity worth Rs 2.5 tn into the banking system. 

RBI’s macroeconomic projections

The forecast for FY26 GDP growth was retained at 6.5%.

• Quarterly forecasts for Q1, Q2, Q3, and Q4 of FY26 were also retained at 6.5%, 6.7%, 6.6%, and 6.3% respectively.
• While the forecasts suggest a range-bound movement of 6.3-6.7% in quarterly GDP growth momentum, the last quarter's growth momentum is seen to be slipping below 6.5%.

The FY26 CPI inflation forecast got revised lower by 30 bps to 3.7%. On a quarterly basis: 

• The forecasts for Q1 and Q2 were lowered by 70 bps and 50 bps each to 2.9% and 3.4%, respectively. In contrast, the forecast for Q3 was raised by 10 bps to 3.9%. Meanwhile, the forecast for Q4 FY26 was retained at 4.4%.
• The quarterly range of CPI projections at 2.9-4.4% is wide and is reflective of the volatility caused by food prices.
• Notably, after remaining below the 4% target in Q4 FY25, CPI inflation is projected to remain subdued in the next three quarters, only to reach the target in the final quarter of FY26.

Rationale behind the aggressive and unanticipated measures

Since the Feb-25 policy review, when the RBI provided its FY26 macroeconomic forecasts for the first time, the projection for GDP growth has seen a mild cumulative pruning of 20 bps. In contrast, the projection for CPI inflation has undergone a much deeper cumulative reduction of 50 bps. More importantly, for the first time in the post-COVID period, the central bank is forecasting inflation to undershoot the 4% policy target. 

With the recent and projected comfort on inflation by its side, the MPC opted for front-loading of monetary policy accommodation to hasten the monetary policy transmission to support domestic growth drivers. In fact, there is a concerted focus on easing credit conditions with the RBI backing up MPC’s front-loaded rate cut action with the provision of substantive, durable liquidity via CRR relaxation in advance to help banks provide visibility on pricing decisions.

Outlook

A key accompanying feature of the bold policy moves by the MPC and RBI is the unambiguous signal to market participants that the central bank is now close to exhausting its conventional policy arsenal. 

• Considering CPI inflation expectation of 4.5% for FY27 (as indicated by the Governor in the policy press conference), a nominal repo rate of 5.50% will keep the real policy rate (nominal rate deflated by one year ahead inflation expectation) at 1.0%. This will provide a reasonably strong impetus to domestic growth.
• The CRR has conventionally seen a floor at 4.00%, with a dip below this level seen only in the case of emergencies. With the Jun-25 policy announcement, the CRR of 3.00% would now mark a new floor in our opinion, with a dip possible only in case of emergency liquidity requirement.

The explicit ‘neutral’ policy stance is now likely to form a stable anchor unless external shocks disrupt the growth-inflation balance substantially to warrant a policy response. With risks to growth and inflation appearing somewhat balanced at this stage, we now expect the MPC to be on pause through the remainder of FY26.

G-sec view 

From a G-sec market perspective, the impact of the RBI’s policy announcements is likely to be neutral:

• While the 50-bps booster rate cut was higher than the expectation of market participants, the reversal of the accommodative policy stance to neutral acts as a dampener.
• Similarly, although the advance provisioning of durable liquidity via CRR relaxation is a pleasant surprise and a welcome move, it simultaneously obviates the need for any OMO support from the RBI in H2 FY26, which potentially would have acted as a source of support for the bond market.

As such, while we retain our 10Y g-sec yield call of 6.00% on the back of the projected disinflationary momentum in the near-term, it is likely to inch up somewhat towards 6.20% levels by the end of FY26 as market participants would start positioning for a moderate uptick in inflation in FY27.

Below is Acuité Ratings & Research Limited's comment: 

“Today’s MPC decision to trim the policy repo rate by 50 bps to 5.50%, following the 100 bps of cumulative easing delivered since February, shows the RBI’s confidence in the ongoing disinflationary trend and they are using the available policy space to boost domestic growth. CPI inflation slipped to a six-year low of 3.2 % in April, and the RBI has revised its FY26 average CPI forecast down to 3.7 %, comfortably below the 4 % medium-term target.

 Alongside this broad-based softness in prices, food inflation is moderating, and core remains benign despite external pressure. The RBI also remains cautious about the dampened global growth prospects. Against this backdrop, the shift in stance from “accommodative” to “neutral” is perhaps the meeting’s most important market signal, that the MPC recognises the narrowing room for further rate cuts.

 From a structural point of view, we still need to revive the private investment and consumption in the country, which have shown some traction of late but still require stronger tailwinds. With the fiscal health of the government and corporates, capacity utilisation and government capex still remaining strong, the biggest risk for the upcoming months remains global headwinds and monsoon and weather-related anomalies. “