Mumbai: Home and auto loans likely to be cheaper as the Reserve Bank of India (RBI) on Friday slashed its key lending rate, or the repo rate, by 50 basis points. This is the 3rd consecutive rate cut by the central bank. The decision was taken unanimously at the bi-monthly Monetary Policy Committee meeting headed by RBI Governor Sanjay Malhotra.
“After assessing the current and evolving macroeconomic situation, the MPC voted to reduce the policy repo rate by 50 basis points (bps) to 5.50 per cent with immediate effect. Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) shall stand adjusted to 5.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.75 per cent. This decision is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth” said the Governor.
Assessment of Growth and Inflation
Growth
The provisional estimates released by the National Statistical Office (NSO) placed India’s real GDP growth in 2024-25 at 6.5 per cent.3 During 2025-26 so far, domestic economic activity has exhibited resilience. Agriculture sector remains strong. With a very good harvest in both the kharif as well as rabi cropping seasons, the supply of major food crops is comfortable.4 The reservoir levels remain healthy.5 The highest procurement of wheat6 in the last four years provides a comforting stock position.7 Industrial activity is gaining gradually, even though the pace of recovery is uneven.8 Services sector is expected to maintain momentum.9 PMI services stood strong at 58.8 in May 2025, indicating robust expansion in activity.
On the demand side, private consumption, the mainstay of aggregate demand, remains healthy, with a gradual rise in discretionary spending.11 Rural demand12 remains steady, while urban demand13 is improving. Investment activity is reviving as reflected by high-frequency indicators.14 Merchandise exports recorded a strong growth in April 2025 after a lacklustre performance in the recent past.15 Non-oil, non-gold imports posted a double-digit growth, reflecting buoyant domestic demand conditions.16 Services exports continue on a strong growth trajectory.17
10. Going forward, the outlook for agriculture sector and rural demand is expected to receive further impetus by the expected above normal southwest monsoon rainfall.18 On the other hand, sustained buoyancy in services activity should nurture revival in urban consumption. The healthy balance sheets of banks and corporates; government’s continued thrust on capex;19 elevated capacity utilisation;20 improving business optimism21 and easing of financial conditions should help further revive investment activity. Trade policy uncertainty however continues to weigh on merchandise exports prospects, while conclusion of free trade agreement (FTA) with the United Kingdom22 and progress with other countries should provide a fillip to trade in goods and services. Spillovers emanating from protracted geopolitical tensions, and global trade and weather-related uncertainties pose downside risks to growth. Taking all these factors into consideration, real GDP growth for 2025-26 is projected at 6.5 per cent with Q1 at 6.5, Q2 at 6.7, Q3 at 6.6 and Q4 at 6.3 per cent. The risks are evenly balanced.
Inflation
11. CPI headline inflation continued its declining trajectory in March-April, with headline CPI inflation moderating to a nearly six-year low of 3.2 per cent (y-o-y) in April 2025. This was led mainly by food inflation, which recorded the sixth consecutive monthly decline. Fuel group witnessed a reversal of deflationary conditions and recorded positive inflation prints during March and April, partly reflecting the hike in LPG prices. Core23 inflation remained largely steady and contained during March-April, despite increase in gold prices exerting upward pressure.24
12. The outlook for inflation points towards benign prices across major constituents. The record wheat production and higher production of key pulses in the Rabi crop season should ensure adequate supply of key food items. Going forward, the likely above normal monsoon along with its early onset augurs well for Kharif crop prospects. Reflecting this, inflation expectations are showing a moderating trend, more so for the rural households.25 Most projections point towards continued moderation in the prices of key commodities, including crude oil. Notwithstanding these favourable prognoses, we need to remain watchful of weather-related uncertainties and still evolving tariff related concerns with their attendant impact on global commodity prices. Taking all these factors into consideration, and assuming a normal monsoon, CPI inflation for the financial year 2025-26 is now projected at 3.7 per cent, with Q1 at 2.9 per cent; Q2 at 3.4 per cent; Q3 at 3.9 per cent; and Q4 at 4.4 per cent. The risks are evenly balanced.