Mumbai: Home, auto and other loans are likely to cost less as the Reserve Bank of India (RBI) cut interest rates by a largerthan-expected 50 basis points on Friday, and unexpectedly reduced the cash reserve ratio for banks to make available more money to lend in a bid to boost the economy. The RBI's six-member monetary policy committee, headed by Governor Sanjay Malhotra and consisting of three external members, voted five to one to lower the benchmark repurchase or repo rate by 50 basis points to 5.5 per cent. It also cut the cash reserve ratio by 100 basis points to 3 per cent, adding Rs 2.5 lakh crore to already surplus liquidity in the banking system. With the latest reduction, the RBI has now cut interest rates by a total of 100 basis points in 2025, starting with a quarterpoint reduction in February - the first cut since May 2020 - and another similarsized cut in April. The central bank, at the same time, changed its monetary policy stance from 'accommodative' to 'neutral' which means rates could increase or decrease in future depending on incoming data, with Malhotra stating that it may have limited space for further easing. The repo rate is the rate at which the RBI lends money to banks to meet their short-term funding needs. With the latest cut in the repo rate, all External Benchmark Lending Rates (EBLR) linked to it will come down. And if the banks fully pass on this to the borrowers, equated monthly instalments (EMIs) on home, auto and personal loans will decline by 50 bps. RBI, Malhotra said, expects lenders to pass on lower borrowing costs to consumers and boost credit growth with the additional cash they would have following the cut in cash reserve ratio by 100 basis points to 3 per cent. The cut in CRR will take effect in four stages between September and December. Slowdown in economy The rate cut comes as the Indian economy slowed to a four-year low of 6.5 per cent in the fiscal year that ended March. RBI projected the economy to grow by the same measure in the current financial year that started on April 1 as rising trade tensions following US President Donald Trump's tariff policies provide headwinds. The central bank lowered its inflation projection to 3.7 per cent for 2025-26 (FY26) from 4 per cent earlier. "While price stability is a necessary condition, it is of course not sufficient to ensure growth," he said. With consumer price inflation at 3.16 per cent in April - the lowest since July 2019 - and further expected to stay below the RBI's 4 per cent target (FY26 inflation now projected at 3.7 per cent), the RBI seems to have seized the opportunity to decisively pivot toward growth. The shift comes amid global trade uncertainties and subdued private capex. Unlike previous disinflation episodes primarily driven by volatile food prices, the current moderation (inflation has remained below 4 per cent for three straight months) is broad-based across multiple segments of the consumer basket and may be an indication of a sustained structural easing in price pressures rather than a fleeting dip.
Today's monetary policy actions should be seen as a step towards propelling growth to a higher aspirational trajectory. The aspiration is for growth of between 7 per cent and 8 per cent.Sanjay Malhotra, Governor, RBI
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