^{An Indian naval officer walks past the logo of India’s central bank, the Reserve Bank of India (RBI), in Mumbai on November 9, 2016. Punit Paranjpe | AFP | Getty Images}

RBI Stuns Markets With Aggressive Rate Cut to Spur Economic Growth

India’s central bank has delivered a sharper-than-expected interest rate cut, slashing its benchmark repo rate by 50 basis points to 5.5%, the lowest since August 2022. This bold move exceeded market expectations, which had anticipated a more modest 25-basis point reduction, and underscores the Reserve Bank of India’s (RBI) urgency in responding to persistent economic challenges.

The decision, announced during a live-streamed press conference by RBI Governor Sanjay Malhotra, marked the third consecutive rate cut since February, bringing the cumulative easing to 100 basis points over just four months.

Why the RBI Acted: Slowing Growth and Easing Prices

Governor Malhotra cited a dual motivation for the outsized cut: inflationary pressures have significantly receded, and GDP growth has lagged behind policy targets amid a volatile global economic landscape.

India’s headline inflation dropped to 3.16% in April, its lowest reading since July 2019, thanks in part to declining fuel and food prices. The central bank now forecasts inflation to average 3.7% in the current financial year, down from a previous projection of 4%.

“This broad-based disinflation allows us room to maneuver,” said Malhotra, though he also cautioned that weather-related risks and geopolitical uncertainty, including tariff tensions with the U.S., remain on the horizon.

India’s Growth Picture: Optimism With Caveats

India’s economy grew 7.4% year-on-year in Q4 of the fiscal year, handily beating the 6.7% consensus estimate, according to Reuters. However, despite this strong quarter, the RBI held its full-year growth forecast steady at 6.5% — a notable slowdown from 9.2% in the previous year.

“The Indian economy continues to be resilient,” Malhotra noted, “but we must support it through forward-looking and flexible monetary policies.”

Analysts at HSBC and Morgan Stanley echoed this sentiment, pointing out that although domestic demand remains relatively strong, manufacturing output and exports have softened, and the private investment cycle has not yet fully recovered post-pandemic.

Policy Shift: From ‘Accommodative’ to ‘Neutral’

Alongside the rate cut, the RBI also announced a change in its monetary policy stance from “accommodative” to “neutral,” signaling that future rate moves will be more data-dependent.

“With this shift, the Monetary Policy Committee (MPC) is positioning itself for greater flexibility,” Malhotra explained. “We are not committing to a prolonged easing cycle, but will respond as conditions evolve.”

What Analysts Are Saying

Shilan Shah, Deputy Chief Emerging Markets Economist at Capital Economics, described the 50-basis point cut as a signal that “the RBI is ending its easing cycle with a bang.”

He added that the central bank used the recent sharp drop in inflation to frontload monetary support for the economy, especially as global economic conditions remain fragile and foreign direct investment inflows into India have moderated in recent quarters.

What’s Next?

While the latest cut brings immediate relief for borrowers and businesses, it also raises questions about the limits of monetary policy. Fiscal space remains constrained, and economists warn that long-term growth will also require structural reforms, especially in infrastructure, labor markets, and productivity.

Malhotra acknowledged this reality, stating, “Monetary policy can only go so far. The real work lies in strengthening the foundation of our economy to ensure that growth is sustainable, inclusive, and resilient.”

Summary

• RBI cuts repo rate by 50 bps to 5.5%, surprising markets.
• Third consecutive rate cut since February, totaling 100 bps.
• Inflation at 3.16%, lowest in nearly 5 years; 2024 forecast revised down to 3.7%.
• Q4 GDP growth at 7.4%, but FY24 forecast stays at 6.5%.
• Policy stance shifts from accommodative to neutral.
• Analysts see this as a bold, possibly final move in current easing cycle.

Final Thought

India’s central bank has made a decisive move at a critical juncture, leveraging a favorable inflation backdrop to support a still-fragile recovery. The move may be bold, but the road ahead remains complex. With inflation under control — for now — and growth facing headwinds, the RBI has made its next step clear: wait, watch, and adapt.