RBI Delivers 50 bps Rate Cut Early, Limits Future Cuts, Says UBS – What’s the Next Focus?

RBI Surprises Markets with Notable Rate Cut

The Reserve Bank of India (RBI) caught market participants off-guard by implementing a 50 basis points (bps) reduction in rates, indicating a pre-emptive strategy aimed at nurturing economic growth. According to UBS, with limited potential for additional cuts, attention is now diverted towards credit transmission and maintaining macroeconomic momentum. The Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, has lowered the benchmark repo rate to 5.50 per cent.

An Unexpected Move by the RBI

UBS Securities views the RBI’s unexpected 50 bps cut in the repo rate as a form of front-loaded stimulus, reflecting limited scope for further rate reductions while concentrating on credit facilitation and the overall macroeconomic environment. “We believe that our baseline estimate of a 5.5 per cent terminal repo rate has been achieved. Nevertheless, due to persisting global uncertainties, the RBI likely retains a buffer of 25-50 bps for additional cuts should growth prospects weaken,” commented Tanvee Gupta Jain, Chief India Economist at UBS Securities. On Friday, the MPC announced a reduction in the benchmark repo rate by 50 bps to 5.50 per cent, which significantly exceeded market expectations. Additionally, the central bank shifted its policy stance from “accommodative” to “neutral.” This marks the third consecutive cut since February 2025, aggregating to a total reduction of 100 bps.

Supporting Lending Through CRR Reduction

Alongside the repo rate cut, the RBI initiated a phased decrease in the cash reserve ratio (CRR) by 100 bps, aiming to bring it down to 3 per cent by the end of November 2025. This will occur in four equal installments of 25 bps each, starting September 6. It is anticipated that this initiative will infuse Rs 2.4 lakh crore into the banking infrastructure, thereby aiding credit transmission. “Our banking team believes that, while the CRR cut releases surplus liquidity, it will also help mitigate the NIM pressure arising from the repo rate reduction, facilitating smoother monetary policy transmission to the credit market,” Tanvee Gupta Jain remarked. UBS Securities expects bank credit growth to gradually rebound, potentially reaching 12% to 13% year-on-year by the end of FY26/FY27, with possibilities for further upside in FY27 should the investment cycle recover.

The Impacts of Increased Liquidity

This surge in liquidity enables banks to allocate the released funds towards loans rather than depositing them with the RBI. With enhanced liquidity, the cost of funds for banks is anticipated to decrease, thereby enabling them to more readily reduce lending rates and pass on the advantages of the prior repo rate cut to their customers. Furthermore, this phased approach offers banks the necessary time and assurance to recalibrate their balance sheets, promoting a more sustainable and wide-reaching transmission of rates across various sectors. Notably, this liquidity initiative coincides with a robust interbank system, which is currently buoyed by a $34 billion surplus (1.2% of NDTL as of June 4), and the overnight call rate lingering at the lower end of the LAF corridor. According to UBS Securities’ credit scorecard, the overall policy climate remains favorable due to enhanced liquidity, a more lenient regulatory stance, and rate cuts; however, other indicators show a mixed bag. The outlook for credit momentum, asset quality, and sensitivity to external factors is neutral, whereas household debt continues to be a point of concern.

Earnings Forecasts and Inflation Projections

Despite the robust policy easing, the RBI has maintained its FY26 real GDP growth projection at 6.5%, with quarterly estimates of 6.5%, 6.7%, 6.6%, and 6.3%. The risks are deemed evenly poised. In his policy statement, Governor Malhotra emphasized that consistent growth in rural economic activities bolsters rural demand, while the recovery in the services sector is invigorating urban demand. Investment is expected to increase, driven by higher capacity utilization, improved corporate financial health, and ongoing government investment in infrastructure. However, uncertainties in trade policy continue to cast shadows over the prospects for merchandise exports, although advancements in free trade agreements—particularly with the UK—signal optimism. On the supply side, agriculture appears encouraging, buoyed by forecasts of an above-average monsoon and strong performance in allied sectors. Nonetheless, persistent geopolitical tensions, global trade challenges, and weather-related unpredictabilities pose risks to growth.

Revised Inflation Outlook

With inflation expectations trending downward, the MPC has adjusted its FY26 CPI inflation forecast down by 30 bps to 3.7% year-on-year, with quarterly figures of 2.9%, 3.4%, 3.9%, and 4.4%, maintaining evenly balanced risks. The RBI governor indicated in his address that there is growing confidence that inflation may fall below the medium-term target of 4% at the margins. However, weather-related risks and evolving tariff issues, along with their impact on global commodity prices, could introduce upward pressures, as noted by the governor.

A Delicate Balancing Act

In summary, the latest decisions made by the MPC illustrate a careful balancing act—aggressively nurturing growth in the short term while signaling a cautious pause in the future. UBS maintains that the RBI has wrapped up major easing efforts for the time being but retains some flexibility to act should growth conditions worsen.