On June 6, 2025, the Reserve Bank of India (RBI) surprised markets with an aggressive 50 basis point (bps) cut in its key repo rate, reducing it to 5.50%. This move, the steepest in five years, also included a 100 bps reduction in the Cash Reserve Ratio (CRR), releasing approximately ₹2.5 lakh crore into the banking system. In this blog post, we delve into the implications of these policy changes for borrowers, investors, and the broader economy.
Understanding the RBI's Rate Cut
What Is the Repo Rate?
The repo rate is the interest rate at which commercial banks borrow funds from the RBI. A reduction in this rate typically leads to lower borrowing costs for banks, which can translate to reduced interest rates for consumers and businesses.
The Significance of the CRR Cut
The CRR is the percentage of a bank’s total deposits that it must maintain as reserves with the RBI. By lowering the CRR, the RBI effectively increases the liquidity available to banks, enabling them to lend more to consumers and businesses.
Impact on Borrowers
Lower EMIs on Loans
With the repo rate cut, borrowers can expect a reduction in their Equated Monthly Installments (EMIs) for loans linked to the repo rate. For instance, a ₹1 crore home loan with a 20-year tenure could see a reduction of approximately ₹3,100 per month.
Increased Access to Credit
The CRR cut enhances banks’ lending capacity, potentially making it easier for consumers to access credit for homes, cars, and personal expenses.
Market Reactions
Surge in Stock Markets
The announcement of the rate cut led to a significant rally in the stock markets. The Sensex surged by 747 points, closing at 82,189 points, driven by gains in banking and financial stocks. Investors’ wealth increased by approximately ₹3.6 lakh crore, pushing the Bombay Stock Exchange’s total market capitalization to just over ₹451 lakh crore.
Positive Sentiment in Financial Markets
Financial experts have lauded the RBI’s bold move. Nilesh Shah of Kotak Mutual Fund expressed that such decisive action could even prompt international policymakers to consider similar approaches.
Economic Implications
Stimulating Economic Growth
Despite strong GDP growth of 7.4% in the last quarter, the RBI’s decision aims to revive weak household consumption in urban areas where stagnant wages have constrained demand. The rate cuts are expected to stimulate economic activity by making borrowing more affordable.
Inflation Management
With retail inflation at a six-year low of 3.16%, well below the RBI’s 4% target, the central bank has room to implement such policy measures without risking runaway inflation.
Looking Ahead
Limited Room for Further Rate Cuts
Following this rate cut, the RBI shifted its policy stance from ‘accommodative’ to ‘neutral’, signaling limited room for further rate cuts. Most economists now expect no further rate changes through the end of the fiscal year in March 2026.
Monitoring Economic Indicators
The central bank will continue to monitor key economic indicators, including inflation trends and industrial production, to determine the need for future policy adjustments.
Conclusion
The RBI’s unexpected 50 bps rate cut is a significant policy move aimed at stimulating economic growth and enhancing liquidity in the banking system. For borrowers, this translates to lower EMIs and increased access to credit. Investors are witnessing positive market reactions, while the broader economy stands to benefit from the enhanced economic activity. As the situation evolves, stakeholders should stay informed about further policy developments and economic indicators.