As inflation cools, RBI hints at growth-inducing monetary policy ahead of June meeting

In April, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) kicked off the new financial year 2025-26 on a positive note by cutting the repo rate to 6% and shifting its

stance to accommodative.

Before that, in its last meeting for the financial year 2024-25 held in February this year, the RBI MPC decided to cut the policy repo rate by 25 basis points to 6.25%. This was the first

rate cut since February 2023. The decision was taken unanimously, as inflation showed signs of cooling and the economy showed steady growth.

Aided by rising private consumption, India’s GDP was expected to grow by 6.4% in 2024-25, according to the First Advance Estimates. For FY26, GDP growth was projected to be slightly higher

at 6.7%.

Inflation, especially food inflation, came down in November and December 2024, helped by good kharif crop output. The RBI kept the inflation forecast for 2024-25 at 4.8%, with the last

quarter (January–March 2025) expected to be at 4.4%. For FY26, inflation is projected to further reduce to 4.2%, assuming a normal monsoon.

Raghav Muthanna, Partner, IndusLaw, said, "RBI’s CPI inflation projection of 4% this financial year as per its annual report is welcome news for the Indian consumer and borrower. Controlled

inflation rate will likely see interest rate cuts by banks and NBFCs which should hopefully incentivize borrowing and spending. Specifically for digital lending players, this news could not

have come any sooner given recent actions by the RBI on increasing risk weights on unsecured loans and the recent release of the stricter Digital Lending Directions, that had prescribed

additional obligations on regulated entities and their lending service providers."

While inflation risks remain due to global uncertainties and weather events, the lower inflation trend gave some space to support growth. "CPI inflation projection for 2024-25 was retained

at 4.8%. Assuming a normal monsoon, CPI for 2025-26 was projected at 4.2%," stated the RBI in its annual report 2024-25.

On the liquidity front, the RBI reduced the Cash Reserve Ratio (CRR) by 50 basis points in two stages in December 2024. This move released about ₹1.16 lakh crore into the banking system to

ease liquidity stress. The RBI also carried out term repo auctions, open market purchases, and USD/INR swaps to manage liquidity.

Throughout 2024-25, liquidity in the banking system kept changing due to capital flows, currency in circulation, and government cash balances. Liquidity was tight from mid-April to June 2024

but turned surplus in Q2 as government spending picked up and currency returned to banks. The RBI actively used tools like repo and reverse repo auctions to manage these fluctuations.

While sticking to its data-driven approach, the RBI’s actions reflected a balanced approach, supporting growth while keeping inflation within target.

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