RBI slashes policy rate by 50 bps to accelerate growth

Singles would have done the job, but the Reserve Bank of India decided to hit a six while chasing its monetary easing target.

- Roshan Kishore

By announcing a higher-than-expected policy rate cut of 50 basis points to 5.5% along with a percentage point reduction in the Cash Reserve Ratio (to be implemented in a staggered manner) it has thrown the proverbial kitchen sink at the growth challenge.

There are now various possible upsides to domestic growth. If the banks also expedite the transmission of interest rate cuts from RBI, mortgage payments could fall and cushion household budgets. This will add to the disposable income tailwinds from the upwards revision in income tax slabs, which have kicked in from April. A good monsoon is expected to boost rural incomes. That all this is happening in what is expected to be a benign inflationary environment—2025-26's inflation forecast has been brought down from 4% to 3.7%—only makes things better. The quarterly inflation projections beginning June 2024 are 2.9%, 3.4%, 3.9% and 4.4%.

The policy rate in this case is the repo rate at which the RBI lends money to banks, making it the anchor of all other interest rates in the economy. CRR is the mandated share of deposits which banks have to keep in cash, either themselves or with the RBI. A reduction in CRR, therefore, frees more money for credit creation (roughly Rs 2.5 lakh crore in this case). After Friday's decision, the MPC has already reduced the repo rate by a percentage point in this easing cycle of five months, taking it to the lowest level since August 2022 when it was 5.4%.