Big rate cut coming? RBI may surprise with 50 bps rate slash to revive credit cycle

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is widely expected to announce a third consecutive rate cut of 25 basis points (bps) in its upcoming meeting. This decision comes as inflation continues to be tamed, with the central bank aiming to balance growth and financial stability. Such a move could relieve borrowers, especially in the home loan sector, while potentially leading to a plateau or slight decrease in fixed deposit rates.

The meeting, led by RBI Governor Sanjay Malhotra, is set to shift the monetary stance from neutral to accommodative, reflecting a focus on growth. "With inflation gradually coming under control and growth needing steady support, the upcoming RBI MPC meeting will be closely watched for any signals on rate direction," said Kunal Varma, Co-Founder and CEO of Freo. This shift is anticipated to complement the cumulative rate cuts over the cycle, which could reach 100 basis points.

According to the State Bank of India's Economic Research Department, a more significant rate cut of 50 basis points could serve as a counterbalance to the current economic uncertainty. "Cumulative rate cut over the cycle could be 100 basis points," the report added, suggesting that previous cuts have led to reductions in repo-linked external benchmark lending rates and marginal cost funds-based lending rates by many banks. "We believe for the first time, liabilities are getting repriced faster in a rate easing cycle," the report noted.

Banks have responded to the previous rate reductions by lowering savings account interest rates to a floor of 2.7 per cent and cutting fixed deposit rates by 30 to 70 bps since February 2025, reflecting a notable shift in the financial landscape as liabilities are repriced. "Transmission to deposit rates is expected to be strong in the coming quarters," the State Bank of India report further commented.

The upcoming policy meeting also holds the potential for revised forecasts on GDP growth and inflation for FY26. Economists expect the Consumer Price Index (CPI) inflation to remain around 4 per cent. Madan Sabnavis, chief economist at Bank of Baroda, highlighted the importance of the commentary on growth and inflation revisions, particularly in light of global economic conditions.

With inflation at 3.16% as of April 2025 and the repo rate at 6%, the MPC meeting is poised to significantly influence India's economic direction. Sahil Lakshmanan, Chief Business Officer of CarePal Money, emphasised the benefits of a sustained low-rate environment, which could enhance access to affordable loans, especially within the healthcare financing sector.

IDFC First Bank's Chief Economist, Gaura Sengupta, expects a 25 bps rate cut in June, citing the decline in inflation as a rationale. "Growth requires monetary policy support," she remarked, noting the uncertainty surrounding domestic and external demand conditions.

The RBI's decision will be announced on June 6, following the MPC's deliberations starting June 4. With the economic context marked by a slowdown in commercial banks' credit growth to 9.8% compared to last year's 19.5%, the anticipated rate cut aims to reinvigorate the credit cycle effectively.

Overall, the RBI's accommodative stance is likely to persist, potentially signalling further rate cuts aimed at supporting economic growth while maintaining inflation control. The strategic adjustments by the central bank are being closely monitored as they have profound implications for borrowers and depositors alike.