Looser Monetary Policy

In a surprise move on June 6, the Reserve Bank of India cut its key interest rate. The repo rate was cut by 50 basis points to 5.5%. That’s double what most analysts were expecting. On top of that, the central bank announced a 100-basis point cut to the cash reserve ratio, which determines the ratio of how much cash banks need to keep aside from each deposited rupee.

It’s the third rate cut this year, and together with the cash reserve ratio reduction, it sends a clear message that the central bank is serious about supporting economic growth, especially with inflation staying under control. However, the move also comes at a time when global risks are rising, from the 39% tariffs imposed by Donald Trump, up to 45-50% on some goods that are currently suspended. This creates uncertainty in capital flows and currency pressures.

Why the RBI Is Easing Now

India’s inflation rate is currently well below the central bank’s 4% target. At the same time, while GDP growth in early 2025 looked solid on paper (around 7.4%), much of it was driven by agriculture and rural consumption. Urban demand and private investment are still lagging.

That gave the central bank room to cut rates more aggressively than expected. Lower interest rates make loans cheaper for businesses and consumers and help them drive new investment and spending. The reserve ratio cut is equally important since it frees up more cash for banks to lend, which could improve credit flow to sectors like housing, infrastructure, and small businesses.

Source: Yahoo Finance

What About the Rupee?

Normally, when a central bank cuts interest rates, its currency can weaken. Investors tend to allocate capital to countries with higher returns, so lower rates might make India less attractive to global investors. So far, the rupee has held steady. But if U.S. rates stay high, or if global investors get spooked by political or trade developments, the rupee could come under pressure.

However, the U.S. dollar is also weakening because of harmful and illogical Trump tariffs that drive capital out of the United States. Due to this reason, the graph of the dollar-rupee is calm and not volatile.

Additionally, a weaker rupee could help Indian exporters, but it also makes imported goods more expensive. Specifically, products like oil could eventually push inflation higher again. For now, though, the Reserve Bank of India is betting that inflation will stay low enough to give it room to maneuver.

What It Means for Markets

India’s stock markets reacted positively to the news. Rate cuts make borrowing cheaper, which is good news for interest-sensitive sectors like housing, consumer goods, and infrastructure. Banks also stand to benefit. While lower rates typically shrink their margins, the CRR cut helps offset that by giving them more funds to work with.

Real estate developers, in particular, welcomed the move. Lower mortgage payments mean more affordability for homebuyers, and better liquidity should help developers finish or launch new projects.

Still, the Reserve Bank has signaled that it won’t keep cutting rates forever. It changed its policy stance from “accommodative” to “neutral,” meaning future moves will depend on how the economy performs. If growth stalls or inflation stays low, more cuts might come. But if inflation rises or global risks worsen, it may hold back rate cuts.