Growth tops RBI agenda as outsized repo, CRR cuts buoy banks

India’s central bank Friday underscored boosting growth as its urgent policy priority, surprising the markets with both a frontloaded and outsized half-a-percentage point rate cut and a simultaneous reduction in the cash reserve ratio (CRR) to inject durable liquidity into the lending markets. The banking index surged to lifetime highs.

Also Read: RBI to cut CRR by 100 bps in four tranches to boost liquidity, effective Sept

The Reserve Bank of India (RBI) lowered the policy rate to 5.5% in the steepest rate reduction since the 75-basis-points Covid-induced cut in March 2020. The CRR was slashed by 100 basis points in four tranches to 3% - the lowest permitted under law – to help release an additional Rs 2.5 lakh crore into the banking system, a move Governor Sanjay Malhotra said would lead to faster transmission.

“I must also add that while price stability is a necessary condition, it is not sufficient to ensure growth,” Malhotra said, as he concluded his formal address to the rate-setting panel’s latest review that surprised most economists and bankers anticipating an incremental policy approach.

Also Read: RBI MPC opts for a 'jumbo' rate cut to bring repo rate down to 5.5%, switches to neutral gear

“A supportive policy environment is vital. This is even more important during periods of high uncertainties such as the current times,” Malhotra said, justifying the actions of the Monetary Policy Committee (MPC) that voted 5-1 in favour of the outsized rate cut.

The governor’s accent on growth was loud and clear through the formal address, as banking and financial stocks leapt to fresh highs after the move to reduce the CRR was announced.

“At the Reserve Bank, therefore, while price stability remains the focus of monetary policy, we are not oblivious to putting in place complementary monetary and credit policies and regulations that support growth and prosperity,” Malhotra said.

Banking stocks surged, with the Bank Nifty hitting a lifetime high. At 11:16 am, the index had surged 1.4%. In equities, the BSE Sensex was at 81,805.64, up 0.45%, while the NSE was at 24,904.60 up 0.62%.

The 10- year government bond yield dropped to as low of 6.14% after the RBI announcement but rose again to 6.20% due to the change in stance to neutral. The yield had closed at 6.24% on Thursday. Rupee opened at 85.86 on Friday, and was 85.81 at 10:30AM after the MPC policy. It closed at 85.79 on Thursday.

In his statement governor Sanjay Malhotra said the monetary policy committee (MPC) decided to front load the rate cut to "stimulus investments and support growth" amid falling domestic inflation and uncertainties in the global macro environment.

It its statement the MPC said that while food inflation outlook remains soft, core inflation is expected to remain benign with easing of international commodity prices in line with the anticipated global growth slowdown. "Inflation has softened significantly over the last six months from above the tolerance band in October 2024 to well below the target with signs of a broad-based moderation. The near-term and medium-term outlook now gives us the confidence of not only a durable alignment of headline inflation with the target of 4 per cent, as exuded in the last meeting but also the belief that during the year, it is likely to undershoot the target at the margin," the MPC said, adding that growth on the other hand remains lower than aspirations amidst challenging global environment and heightened uncertainty.

The RBI also reduced its consumer price inflation forecast for the current fiscal year ending March 2026 to 3.70% from 4% in it had predicted in April. The repo rate reduction and CRR cut together paving way for lenders to lower lending and deposit rates immediately.

Five out of the six MPC members voted to cut the repo rate by 50 basis with Saugata Bhattacharya voting for a lower 25 basis points cut. "It is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum. This changed growth-inflation dynamics calls for not only continuing with the policy easing but also frontloading the rate cuts to support growth," MPC said.

But the MPC also changed its stance to neutral from accommodative, signalling that probably the rate cut cycle has come to or near its end. "After having reduced the policy repo rate by 100 bps in quick succession since February 2025, under the current circumstances, monetary policy is left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral. From here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance. The fast-changing global economic situation too necessitates continuous monitoring and assessment of the evolving macroeconomic outlook," the statement said.

Governor Sanjay Malhotra said India's strong macroeconomic fundamentals and benign inflation outlook provides space to monetary policy to support growth while remaining consistent with the goal of price stability. "As the global environment remains uncertain, it has become even more important to focus on domestic growth amidst sustained price stability. Accordingly, today’s monetary policy actions should be seen as a step towards propelling growth to a higher aspirational trajectory," he said.

All 12 financial institutions in an ET poll had predicted a quarter-percentage-point cut in the policy repo rate, or the rate at which the central bank lends to banks, to 5.75% at the June 4-6 RBI Monetary Policy Committee meeting.

India's retail inflation, as measured by the Consumer Price Index (CPI), slumped to 3.16% in March from 3.34% in February. It is expected to be below the 4% target mandated for the central bank due to moderating food prices and a statistical base effect.