RBI stuns markets with big rate cut, backs SBI’s bold bet
The RBI’s decision to go bigger reflects a strong push to support India’s economic momentum when global trade is slowing and growth prospects are being revised downward
In an unexpected move that caught markets off guard, the Reserve Bank of India (RBI) has lowered its key policy interest rate, the repo rate by 0.50 percentage points, bringing it down to 5.5 per cent.
The decision was announced after a meeting of the Monetary Policy Committee, led by RBI Governor Sanjay Malhotra. Most economists had expected a smaller cut of 0.25 percentage points, making this a significant deviation from the consensus view. The RBI also changed its policy stance from “accommodative” to “neutral,” signalling a flexible approach in managing growth and inflation.
RBI belies predictions
Also read | Will RBI’s MPC go for a 'jumbo' repo rate cut, as SBI suggests?
The research team at State Bank of India (SBI), however, had been expecting exactly this outcome. In a series of reports published ahead of the policy meeting, SBI’s Economic Research Department, headed by Group Chief Economic Adviser Soumya Kanti Ghosh, argued that a 50 basis point cut wasn’t just possible but necessary. They believed such a move would help revive lending and reassure markets.
One of their key arguments was that inflation had eased significantly. Consumer price inflation fell to 3.34 percent in March 2025, the lowest in more than five years, largely due to a drop in food prices. With inflation expectations staying low, the SBI team saw a strong case for reducing interest rates. They also pointed out that the banking system had plenty of liquidity. Savings account interest rates had already fallen to around 2.70 percent, and fixed deposit rates had been steadily coming down since February.
Credit growth concern
Another concern was the slowdown in credit growth. Lending by commercial banks had dropped sharply to 9.8 percent by mid-May, compared to 19.5 percent a year ago. That suggested the RBI’s past rate cuts weren’t yet having the desired effect, and a stronger push might be needed to get banks lending again. Lastly, they highlighted the broader economic picture. With India's GDP growth softening and global trade expected to slow further in 2025, they believed a bold rate cut was essential to keep investment and consumption from stalling.
In its statement, the RBI said the decision was driven by a more favourable outlook on inflation, now revised down to 3.7 percent for the full year, as well as increasing global risks. Governor Malhotra acknowledged the difficult balance between managing inflation and supporting growth and emphasised that the central bank needed to act decisively to keep the economy on track. The change to a neutral policy stance means the RBI is not committing to further cuts right now but is keeping the door open for adjustments depending on how conditions evolve.
Positive developments
The RBI also noted a few positive developments, including the early arrival of the monsoon and stable underlying inflation. At the same time, it warned of potential disruptions from global spillovers and technological shifts that could affect growth or prices in the coming months.
For the average consumer, the biggest impact of this rate cut will be seen in borrowing costs. Home loan and business loan rates that are linked to the external benchmark will likely fall during the next reset cycle. Savers, however, may not be as happy. New fixed deposit rates are expected to decline further in response to the rate cut, especially for short- and medium-term deposits. Those who already have fixed deposits won’t see any change until their deposits mature, but anyone looking to invest fresh funds in FDs will likely face lower returns in the coming weeks.
Surge in stock market
The stock market responded positively to the news. Banking and real estate shares gained ground, as investors welcomed the possibility of stronger loan growth and improved consumer demand.
Also read | RBI cuts repo rate again: Signal for growth amid global headwinds
For SBI’s research team, this was a moment of validation. They were one of the few voices predicting a bold move, and their data-driven arguments were ultimately echoed in the central bank’s decision. They’ve also forecasted that the RBI could cut rates by as much as one full percentage point over the course of the year. That prediction will now be closely watched.
As one senior SBI economist put it, sometimes the data tells a story the consensus doesn’t see. Today, the RBI listened to that story.
