Innovative, out of box, and a 'Lucas unanticipated surprise'

Today's monetary policy committee (MPC) statement may be unexpected for the wider market in terms of the quantum of rate cuts but was in line with our assessment of ground reality and the needs of the economy.

- SOUMYA KANTI GHOSH

A robust gross domestic product (GDP) growth in the March quarter and broadbased falling inflation prepared the ground for the jumbo rate cut.

After the Covid-19 pandemic, this is the first time that the Reserve Bank of India (RBI) has reduced policy repo rate by 50 basis points (bps) to 5.5 per cent. This frontloaded larger cut will reinvigorate a credit cycle.

The cumulative reduction of 100 bps in repo rate will transmit to both assets and liabilities.

Banks have already reduced interest rates on savings accounts to 2.7 per cent.

Also, fixed deposit (FD) rates have been reduced in the range of 30-70 bps since February 2025.

Transmission to deposit rates is expected to be strong in the coming quarters with further rate cut in deposits expected from banks.

Further, the staggered cut in cash reserve ratio (CRR) by 25 bps starting September would release primary liquidity of about ₹2.5 trillion into the banking system by December 2025.