RBI Monetary Policy Preview: MPC Likely to Cut Repo Rate to 5.75% Amid Falling Inflation

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is also expected to cut the 25 basis points (bps) of the repo rate in its next meeting, set between June 4 and 6. This will be the third successive repo rate cut since February 2025, lowering the policy rate to 5.75 per cent.

The decision is backed by the consensus of economists, which is fueled by inflation staying below the central bank's 4 per cent target.

The Reason Behind the Rate Cut

The main motivation for the anticipated rate reduction is the sharp moderation of inflation, which offers room for monetary loosening. Headline inflation, as captured by year-on-year changes in the all-India consumer price index (CPI), moderated to 3.2 per cent during April, its lowest rate since July 2019, from 3.3 per cent in March. This moderation is mainly due to a consistent decline in food prices.

Economists contend that as inflation is persistently below the 4 per cent target for three consecutive months (February, March, and April), CPI should be permanently aligned with the 4 per cent target over a horizon of 12 months. Under the flexible inflation targeting (FIT) strategy, the RBI is required to keep CPI at 4 percent with +/-2 per cent band. RBI's 2024-25 annual report also shows that "benign inflation outlook and moderate growth justify monetary policy to be growth supportive, but monitor the fast-changing global macroeconomic conditions cautiously".

 Policy Stance and Forecast Revisions

The MPC is likely to retain its 'accommodative' monetary policy stance. This stance has been taken in the April policy meet, replacing a 'neutral' one.

Economists also expect RBI to update its real Gross Domestic Product and FY26 inflation projections. RBI's current estimate of CPI inflation in FY26 is 4 percent.

The easing of supply chain pressures, weakness in global commodity prices, and expectations of an above-normal south-west monsoon are considered positive for the inflation situation in FY26.

Any possible downward revision of the FY26 CPI inflation forecast will be a crucial determinant in assessing the possible depth of the ongoing rate-cutting cycle.

For growth, the real GDP growth in FY26 is estimated at 6.5 per cent. As the domestic economy posted a strong 7.4 per cent growth in the January-March 2025 quarter, a four-quarter peak, the FY25 overall growth rate stood at 6.5 per cent, a four-year low.

In spite of this, the RBI annual report shows that the Indian economy is "well placed to maintain its status as the fastest growing major economy in 2025-26," driven by virtue of factors such as a rise in private consumption, corporates and banks with robust balance sheets, loosening financial conditions, and continued government capital spending.

 Impact on Borrowers and Future Outlook

A 25 bps cut in the repo rate would positively impact borrowers, since all external benchmark lending rates (EBLR) tied to it will also come down by a corresponding amount. This would mean a cut in equated monthly instalments (EMIs) on home and personal loans.

After a 50 bps cut in the repo rate since February 2025, the majority of banks have already passed on this cut in their repo-linked lending rates and have also brought down their marginal cost of funds-based lending rates (MCLR). 

In the future, analysts believe further softening in the ongoing financial year. After the anticipated June reduction, the RBI is expected to carry out a combined cut of 50 bps in the current fiscal year.

ICRA Ltd. chief economist Aditi Nayar predicts "Two more cuts in the next two policy reviews," reducing the repo rate to 5.25 per cent by the end of this cycle. This sustained emphasis on support for growth, underwritten by a supportive inflation backdrop, is set to dictate India's monetary environment in the months to come.

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