What Might Friday’s Monetary Policy Reveal?
RBI Expected to Reduce Repo Rate by 25 Bps to 5.75% in June Policy Announcement, Lowering Loan EMIs
The Reserve Bank of India (RBI) is anticipated to lower the repo rate by 25 basis points (bps) to 5.75% during its upcoming policy meeting in June. This move is expected to ease the burden of loan equated monthly installments (EMIs) for borrowers. The central bank is likely to project the fiscal year 2026 inflation target at 4% and GDP growth at 6.5%, emphasizing the need for abundant liquidity to facilitate effective rate transmission. Experts predict that, considering global uncertainties and declining inflation trends, rates may witness further reductions.
Anticipated Repo Rate Adjustment
Market analysts have already factored in a 25 bps cut in the repo rate. It remains to be seen if the RBI will adjust its inflation and growth projections for FY26 accordingly. The Monetary Policy Committee (MPC) of the RBI is expected to vote for a reduction of 25 bps in the repo rate, following two consecutive rate cuts of 25 bps each in February and April. Such a decrease will directly influence loans linked to the External Benchmark Lending Rate (EBLR), as these loans will be promptly re-priced. As a result, borrowers with home loans, car loans, or small business loans will benefit from reduced interest rates. Approximately 55-60% of loans are on the EBLR, meaning a significant portion of customers will gain from this rate adjustment.
Inflation and Growth Outlook from the RBI
The RBI is expected to maintain its GDP growth forecast for FY26 at 6.5%, indicating a balanced risk environment. India’s GDP growth has recently shown positive surprises, with a remarkable 9.2% growth in FY24 and an unexpected 7.4% in Q4FY25, elevating the FY25 growth rate to 6.5%. While it is projected that headline retail inflation will average between 3-3.5% this year, the RBI may choose to retain its forecast at 4% due to uncertainties in the global economy and potential supply-side disruptions. Specifically, food prices, which have thus far been stable, could surge due to adverse weather conditions or other influences. Already, unexpected early rains have impacted vegetable production, and onion prices, for example, are expected to rise. Additionally, inflation is anticipated to increase in FY27 due to a low base.
RBI’s Liquidity Strategy
After shifting to an “accommodative” stance in April, the RBI is likely to reassure banks and the market regarding the continued abundance of liquidity. Since the fourth quarter of FY25, it has injected approximately Rs 5.2 lakh crore into the system, predominantly through Open Market Operations (OMOs). This reliance on OMOs is expected to persist. As of May 2025, the liquidity surplus in the banking system has reached Rs 1.7 lakh crore, about 0.7% of net demand and time liabilities (NDTL), and is projected to increase to Rs 5 lakh crore, or roughly 2% of NDTL, by August, driven by government spending. Government cash balances surged to Rs 4.4 lakh crore by May 23, 2025, thanks to a substantial Rs 2.7 lakh crore dividend from the RBI. The full extent of government expenditure’s effect on liquidity will be evident by August.
The Role of Liquidity
For efficient transmission of policy rate reductions to lending rates, particularly on loans, adequate system liquidity is crucial. Experts have observed that following the 50 bps rate cut, the lending rate gap for new rupee loans has been limited to 6 bps compared to 26 bps for new term deposits, suggesting that banks swiftly reduced deposit rates relative to loans. In fact, banks have already lowered interest rates on savings accounts as well. To assure proper transmission to loan rates, the central bank intends to maintain sufficient liquidity in the system. The shorter end of the yield curve has already adjusted; for instance, the weighted average call rate is approaching 5.75%. Furthermore, analysts believe that a deceleration in credit growth can potentially recover with enhanced liquidity in the marketplace.
Potential for Further Rate Reductions
Some experts suggest that the monetary policy committee might be inclined to set the terminal rate at 5%, meaning the repo rate could reduce to 5%. They argue that retail inflation is likely to stay well-controlled and below 4%. With favorable conditions for food prices stemming from a promising monsoon and strong winter crop yield, as well as an ongoing decline in pulse inflation due to higher supply, inflation remains projected to stay subdued. Additional factors—such as a negative output gap, lower costs for manufacturing inputs, and moderating wage growth—are expected to suppress core inflation levels. However, economists caution that while the economy has exhibited strong growth recently, global uncertainties and potential setbacks from US tariff policies could dampen India’s export performance, resulting in a growth figure that falls short of the RBI’s 6.5% forecast. Thus, the central bank aims to keep borrowing costs manageable.
