Monetary Policy Committee (MPC) Statement Overview

The latest MPC statement aligns with the needs of the economy, despite unexpected rate cuts for the wider market.

Key Outcomes

• Repo Rate Reduction: The Reserve Bank of India (RBI) reduced the policy repo rate by 50 basis points to 5.5%, marking a cumulative reduction of 100 basis points.
• Transmission of Rates: Interest rates on savings accounts have dropped to 2.7%, and fixed deposit rates have decreased by 30-70 basis points since February 2025.
• Cash Reserve Ratio (CRR) Cut: A staggered 25 basis points cut in CRR starting September will inject ₹2.5 trillion liquidity into the banking system by December 2025.
• Monetary Policy Stance: The stance shifted from accommodative to neutral, contingent on incoming data and the evolving economic situation.

Implications

• Bank Margins: The CRR reduction is expected to improve net interest margins by 5-6 basis points.
• Money Multiplier Effect: A 20-30 basis points increase will boost M3 growth within an inflation-targeting regime.
• GDP Growth Projection: Projected at 6.5% for FY26, with sustained rural economic activity supporting growth.
• Current Account Deficit (CAD): Expected to remain low with Q4FY25 trade deficit moderation, strong services exports, and remittance receipts.
• Financial Stability: Banks and NBFCs have shown improved profits and sound financial parameters.

Conclusion

The MPC's decision is timely and credible, focusing on domestic growth and price stability amid global uncertainties. This stance, alongside the RBI's profit transfer, provides fiscal policy headroom for necessary stabilization.