Overview: What Happened in June 2025
On June 6, 2025, the Reserve Bank of India (RBI) announced its latest monetary policy decision with a significant 50 basis point cut in the repo rate to 5.5%. The Cash Reserve Ratio (CRR) was also reduced in a staggered manner from 4% to 3%, injecting substantial liquidity into the banking system. The policy stance was changed from “accommodative” to “neutral,” signalling a more cautious, data-driven approach going forward.
Key Indicators:
- Repo Rate: Cut from 6.0% to 5.5%
- CRR: Reduced to 3% (by Dec 2025)
- Inflation Forecast: Downward revision to 3.7%
- GDP Forecast: Maintained at 6.5% for FY26
- Forex Reserves: $691.5 billion
Policy Analysis
1. Growth vs. Inflation
- The RBI sees a benign inflation path: CPI at 3.7%, allowing room to support growth.
- Despite external uncertainties, the Indian economy is resilient, with a 6.5% growth forecast driven by strong agriculture, services, and private consumption.
2. Liquidity Measures
- Repo rate cut: Lowers the cost of borrowing for banks.
- CRR cut: Frees up ₹2.5 lakh crore into the system.
- Liquidity impact: Aims to ease credit conditions and boost lending.
3. Policy Transmission (Retail + Industry)
- Transmission of repo rate cuts to deposit and lending rates is in progress but lagged:
- Deposit rates down ~27 bps
- Lending rates on new loans down ~6 bps
- Expected to pick up over the next 6–9 months.
4. Retail Borrowers
- Impact: Lower EMIs in the coming months as banks pass on rate cuts.
- But: Lower deposit rates may discourage retail savings in banks.
- Banks may respond with targeted offers to retain depositors.
5. Industrial Borrowing
- Lower cost of capital can encourage private investment.
- Liquidity boost improves banks’ lending capacity.
- However, demand-side credit pickup depends on business confidence and capex cycles.
6. Bank Health
- Strong capital buffers (CRAR 16.43%) and improved NPA ratios (GNPA 2.42%).
- RBI sees the system as robust; stresses in unsecured loans and MFIs are being monitored.
Global Context and INR-FII Dynamics
7. Exchange Rate and FII Investment
- Repo rate cut weakens INR: Lower rates reduce the return on INR assets, making them less attractive to foreign investors.
- US dollar remains strong: US Fed is cautious, keeping interest rates higher; global funds prefer USD assets.
- INR under pressure: Weakens if outflows persist and India-US rate gap widens.
8. What Will Attract FIIs Back?
- Strong equity performance
- Stable INR and predictable policy
- Continued macroeconomic stability
- Lower global risk aversion
9. Forex Resilience
- India’s forex reserves ($691.5 bn) are robust.
- CAD under control, thanks to strong services exports and remittances.
- RBI only intervenes in FX markets during abnormal volatility, not to fix the rupee at a level.
RBI’s Communication Strategy and Market Confidence
- The Governor’s Q&A reaffirmed RBI’s flexible, data-based stance.
- CRR cut rationale: 3% is seen as sufficient in the current cycle.
- Emphasis on trust, stability, and medium-term price predictability.
“Price stability preserves purchasing power and provides certainty for savers and investors alike.”
Final Assessment
| Stakeholder | Impact |
|---|---|
| Retail Borrowers | Lower loan rates, slightly weaker returns on deposits |
| Businesses | Easier credit, but investment response may lag |
| Banks | Stronger lending capacity, improved liquidity |
| FII Investors | Cautious near-term outlook, prefer stability and FX clarity |
| INR Strength | Mild weakening possible; RBI monitoring global conditions |
Conclusion: This policy is pro-growth, pro-liquidity, and cautiously optimistic. It balances internal macro strength with external uncertainties. While it may not trigger immediate FII inflows or retail deposit surges, it sets the foundation for steady credit growth and macro resilience.
