Nifty, Bank Nifty jumped on the RBI bazooka; what’s next?

·       Despite the strange reversal to a neutral stance, the RBI may continue to cut 25 bps every alternate meeting going forward, following the Fed.

·       RBI cuts 100 bps in H1CY25 after the policy mistake of holding rates in H2CY24  at too high & too long despite below 4% target core CPI and Fed cuts

·       RBI now matched the Fed’s 100 bps rate cuts in H2CY24; looking ahead, RBI may follow Fed rate action with a focus on domestic macros

·       Indian economy needs to grow by at least 8-10% for the next 25 years to become the aspirational 3rd largest economy in the world by 2047-50

·       India also has to bring down the elevated 8% average unemployment rate below 5% with quality employment, ensuring inclusive economic growth rather than a ‘K’-shaped recovery at present.

India’s benchmark stock index, Nifty, and also Bank Nifty surged on the RBI bazooka as the RBI unexpectedly cut 50 bps against expectations of 25 bps. RBI also confirmed 100 bps CRR cuts in a 25 bps pace from September 25 till November’25. Overall, as RBI delivered bigger than expected 50 bps rate cuts with confirmed guidance of further 100 bps rate cuts, but unexpectedly reversed to a ‘neutral’ stance from ‘accommodative’, it may be termed as an ‘owlish’ cut. The market is now confused about the future RBI rate cuts. Thus, the overall impact of the RBI bazooka is quite limited. Although the RBI cuts 50 bps vs 25 bps expectations, there was some rumor of a 50 bps rate cut just a few days ago after an SBI report.

On June 6, 2025, the Reserve Bank of India (RBI) announced its monetary policy decisions following the meeting of its Monetary Policy Committee (MPC) held from June 4-6, 2025.

Repo Rate Cut: The MPC, led by RBI Governor Sanjay Malhotra, voted 5:1 to reduce the repo rate by 50 basis points (bps) to 5.5% from 6%. This marked the third consecutive rate cut in 2025, totaling 100 bps since February, and was the sharpest easing cycle since the 75 bps cut during the COVID-19 pandemic in March 2020. The decision was driven by low inflation (CPI at 3.2% in April, the lowest since July 2019) and slower-than-expected economic growth.

Cash Reserve Ratio (CRR) Reduction: The RBI slashed the CRR by 100 bps to 3%, to be implemented in four staggered 25 bps cuts starting from September 6, October 4, November 1, and November 29, 2025. This move is expected to release approximately ₹2.5T into the banking system, boosting liquidity, reducing funding costs, and supporting credit expansion during India’s Festival season.

Policy Stance Change: The RBI MPC reversed its monetary policy stance again from ‘accommodative’ to ‘neutral,’ signaling a data-dependent approach to balance growth and inflation while avoiding excessive market exuberance. This change reflects confidence in the disinflationary trend and flexibility for future policy adjustments.

Inflation and GDP Projections: The RBI revised its CPI inflation forecast for FY 2025-26 to 3.7%, down 30 bps from the earlier 4%, due to easing food prices, softening global commodity prices, and expectations of an above-normal monsoon. The GDP growth forecast for FY26 was retained at 6.5%, with quarterly projections of 6.5% (Q1), 6.7% (Q2), 6.6% (Q3), and 6.3% (Q4). The RBI noted that rural demand, supported by a strong monsoon and a revival in urban demand, would drive growth despite global (Trump) trade war uncertainties.

RBI cuts rate by 50 bps in June’25 policy meeting, back to back after April cut of 25 bps

On June 6, 2025, the Reserve Bank of India (RBI) cut its key repo rate by 50 bps to 5.50%, bigger than the market consensus of -0.25%, while unexpectedly shifting its policy stance from accommodative to neutral. The move brought total rate cuts to 100 bps since February, pushing borrowing costs to their lowest level since August 2022. Driven by easing inflation, slowing economic growth, and escalating Trump trade war tensions, coupled with global economic & trade fragmentations.

The RBI also slashed the standing deposit facility (SDF) or the effective reverse repo rate by 50 bps to 5.25% and the marginal standing facility (MSF) and bank rates to 5.75%, while keeping the cash reserve ratio (CRR) steady at 4.00%, while confirming 100 bps cuts (CRR) by four equal tranches of 25 bps each from July to November’25 to ease banking liquidity further ahead of India’s Festival and holiday season. RBI had cut CRR by 50 bps already in December 2024 and by November 2025; the CRR will be 3.00%, bringing it to the lowest level since April 2021, post-COVID low levels.

In June’25, the RBI projected India’s FY26 economic outlook as:

·       Real GDP growth: 6.5% vs 6.5% prior estimate and  actual FY25 estimate of 6.5%

·       Total CPI: 3.7% vs 4.0% prior estimate and 4.9% for CY24; current 2025 average 3.6%

·       Core CPI is now 4.2%; IN April 2024, AVG was 3.4% vs 3.4% in 2025 (YTM)

Full text of RBI Monetary Policy statement: June 6, 2025

“The Monetary Policy Committee (MPC) held its 55th meeting from June 4 to 6, 2025, under the chairmanship of Shri Sanjay Malhotra, Governor of the Reserve Bank of India. The MPC members Dr. Nagesh Kumar, Shri Saugata Bhattacharya, Prof. Ram Singh, Dr. Poonam Gupta, and Dr. Rajiv Ranjan attended the meeting.

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 percent with immediate effect. Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) shall stand adjusted to 5.25 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.75 percent. This decision is in consonance with achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

Growth and Inflation Outlook

The uncertainty around the global economic outlook has ebbed somewhat since the MPC met in April in the wake of a temporary tariff reprieve and optimism around trade negotiations. However, it continues to remain elevated to weaken sentiments and lowering global growth prospects. Accordingly, global growth and trade projections have been revised downwards by multilateral agencies. Market volatility has eased in the recent period with equity markets staging a recovery, dollar index and crude oil softening, though gold prices remain high.

According to the provisional estimates released by the National Statistical Office (NSO) on May 30, 2025, real GDP growth in Q4 2024-25 stood at 7.4 percent as against 6.4 percent in Q3. On the supply side, real gross value added (GVA) rose by 6.8 percent in Q4 2024-25. For 2024-25, real GDP growth was placed at 6.5 percent, while real GVA recorded a growth of 6.4 percent.

Going forward, economic activity continues to maintain momentum in 2025-26, supported by private consumption and traction in fixed capital formation. The sustained rural economic activity bodes well for rural demand, while continued expansion in the services sector is expected to support the revival in urban demand. Investment activity is expected to improve in light of higher capacity utilization, improving balance sheets of financial and non-financial corporates, and the government’s capital expenditure push. Trade policy uncertainty continues to weigh on merchandise export prospects, while the conclusion of the free trade agreement (FTA) with the United Kingdom and progress with other countries are supportive of trade activity.

On the supply side, agriculture prospects remain bright on the back of an above-normal southwest monsoon forecast and resilient allied activities. The services sector is expected to maintain its momentum. However, spillovers emanating from protracted geopolitical tensions, global trade, and weather-related uncertainties pose downside risks to growth. Taking all these factors into account, real GDP growth for 2025-26 is projected at 6.5 percent, with Q1, Q2 at 6.7 percent, Q3 at 6.6 percent, and Q4 at 6.3 percent. The risks are evenly balanced.

CPI headline inflation continued its declining trajectory in March and April, with headline CPI inflation moderating to a nearly six-year low of 3.2 percent (year-on-year) in April 2025. This was led mainly by food inflation, which recorded the sixth consecutive monthly decline. The fuel group witnessed a reversal of deflationary conditions and recorded positive inflation prints during March and April, partly reflecting the hike in LPG prices. Core inflation remained largely steady and contained during March-April, despite the increase in gold prices exerting upward pressure.

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 an 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 rural households. Most projections point towards continued moderation in the prices of key commodities, including crude oil. Notwithstanding these favorable 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 percent, with Q1 at 2.9 percent, Q2 at 3.4 percent, Q3 at 3.9 percent, and Q4 at 4.4 percent. The risks are evenly balanced.

The rationale for Monetary Policy Decisions

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 percent, as exuded in the last meeting, but also the belief that during the year, it is likely to undershoot the target at the margin. While the food inflation outlook remains soft, core inflation is expected to remain benign with the easing of international commodity prices in line with the anticipated global growth slowdown. The inflation outlook for the year is being revised downwards from the earlier forecast of 4.0 percent to 3.7 percent. Growth, on the other hand, remains lower than our aspirations amidst a challenging global environment and heightened uncertainty.

Thus, 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. Accordingly, the MPC voted to reduce the policy repo rate by 50 bps to 5.50 percent. Dr. Nagesh Kumar, Prof. Ram Singh, Dr. Rajiv Ranjan, Dr. Poonam Gupta, and Shri Sanjay Malhotra voted to decrease the policy repo rate by 50 bps. Shri Saugata Bhattacharya voted for a 25 bps cut in the repo rate.

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 its 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 to strike the right growth-inflation balance. The fast-changing global economic situation also necessitates continuous monitoring and assessment of the evolving macroeconomic outlook.”

Full text of RBI Governor Malhotra’s prepared statement: June 6, 2025

“The 55th meeting of the Monetary Policy Committee (MPC) was held in the backdrop of an early and promising start of the monsoon season, which is of vital significance for the Indian economy. In contrast, the global backdrop remains fragile and highly fluid. The uncertainty around the global economic outlook has somewhat ebbed since the MPC met in April in the wake of a temporary tariff reprieve and optimism around trade negotiations. However, it is still high to weaken sentiments and lower global growth prospects. Accordingly, global growth and trade projections have been revised downwards by multilateral agencies. Moreover, the last mile of disinflation is turning out to be more protracted. As the growth-inflation trade-off is becoming more challenging, monetary authorities are charting out a more cautious and carefully calibrated policy trajectory.

Looking beyond the near term, growing economic and financial fragmentation is reshaping the global economy. Besides, complex interconnections within the financial system, elevated debt levels, and the growing influence of frontier technologies are raising financial stability concerns. Amidst heightened volatility in capital flows and exchange rates, coupled with constrained policy space, central banks of emerging market economies have a tougher task of stabilizing their economies against global spillovers.

In this global milieu, the Indian economy presents a picture of strength, stability, and opportunity. First, strength comes from the strong balance sheets of the five major sectors - corporations, banks, households, government, and the external sector. Second, there is stability on all three fronts – price, financial, and political – providing policy and economic certainty in this dynamically evolving global economic order. Third, the Indian economy offers immense opportunities to investors through 3Ds – demography, digitalization, and domestic demand. This 5x3x3 matrix of fundamentals provides the necessary core strength to cushion the Indian economy against global spillovers and propel it to grow at a faster pace.

Decisions of the Monetary Policy Committee (MPC)

The Monetary Policy Committee (MPC) met on the 4th, 5th, and 6th of June to deliberate and decide on the policy repo rate. After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 5.50 percent with immediate effect; consequently, the standing deposit facility (SDF) rate shall stand adjusted to 5.25 percent and the marginal standing facility (MSF) rate and the Bank Rate to 5.75 percent.

I shall now briefly set out the rationale for these decisions. 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 percent, as exuded in the last meeting, but also the belief that during the year, it is likely to undershoot the target at the margin. While the food inflation outlook remains soft, core inflation is expected to remain benign with the easing of international commodity prices in line with the anticipated global growth slowdown. The inflation outlook for the year is being revised downwards from the earlier forecast of 4.0 percent to 3.7 percent.

 Growth, on the other hand, remains lower than our aspirations amidst a challenging global environment and heightened uncertainty. Thus, 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. Accordingly, the MPC voted to reduce the policy repo rate by 50 basis points to 5.50 percent.

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 its 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 to strike the right growth-inflation balance. The fast-changing global economic situation also necessitates continuous monitoring and assessment of the evolving macroeconomic outlook.

Assessment of Growth and Inflation

The provisional estimates released by the National Statistical Office (NSO) placed India’s real GDP growth in 2024-25 at 6.5 percent.3 During 2025-26 so far, domestic economic activity has exhibited resilience. The 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. The reservoir levels remain healthy. The highest procurement of wheat in the last four years provides a comforting stock position. Industrial activity is gradually increasing, even though the pace of recovery is uneven.8 The services sector is expected to maintain momentum. 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. Rural demand remains steady, while urban demand is improving. Investment activity is reviving as reflected by high-frequency indicators. Merchandise exports recorded strong growth in April 2025 after a lackluster performance in the recent past. Non-oil, non-gold imports posted a double-digit growth, reflecting buoyant domestic demand conditions. Services exports continue on a strong growth trajectory.

Going forward, the outlook for the agriculture sector and rural demand is expected to receive further impetus from the expected above-normal southwest monsoon rainfall. On the other hand, sustained buoyancy in service activity should nurture a revival in urban consumption. The healthy balance sheets of banks and corporates, the government’s continued thrust on capex, elevated capacity utilization, improving business optimism, and easing of financial conditions should help further revive investment activity.

Trade policy uncertainty, however, continues to weigh on merchandise export prospects, while the conclusion of a 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, 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 percent with Q1 at 6.5, Q2 at 6.7, Q3 at 6.6, and Q4 at 6.3 percent. The risks are evenly balanced.

Inflation

CPI headline inflation continued its declining trajectory in March-April, with headline CPI inflation moderating to a nearly six-year low of 3.2 percent (y-o-y) in April 2025. This was led mainly by food inflation, which recorded the sixth consecutive monthly decline. The fuel group witnessed a reversal of deflationary conditions and recorded positive inflation prints during March and April, partly reflecting the hike in LPG prices. Core inflation remained largely steady and contained during March-April, despite the increase in gold prices exerting upward pressure.

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 an 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 rural households.

Most projections point towards continued moderation in the prices of key commodities, including crude oil. Notwithstanding these favorable 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 percent, with Q1 at 2.9 percent, Q2 at 3.4 percent, Q3 at 3.9 percent, and Q4 at 4.4 percent. The risks are evenly balanced.

External Sector

With the moderation in trade deficit in Q4:2024- 25, alongside strong services exports and remittance receipts, the current account deficit (CAD) for 2024-25 is expected to remain low. Furthermore, despite rising geopolitical uncertainties and trade tensions, India’s merchandise trade remained robust in April 2025. As imports grew faster than exports, the trade deficit, however, widened during the month. Going forward, net services and remittance receipts are likely to remain in surplus, counterbalancing the rise in trade deficit. The CAD for 2025-26 is expected to remain well within the sustainable level.

On the financing side in 2024-25, foreign portfolio investment (FPI) to India dropped sharply to 1.7 billion US$, as foreign portfolio investors booked profits in equities. Net foreign direct investment (FDI) was too moderate. It is germane to point out that this moderation is on account of a rise in repatriation and net outward FDI, while gross FDI increased by 14 percent. The rise in repatriation is a sign of a mature market where foreign investors can enter and exit smoothly, while high gross FDI indicates that India continues to remain an attractive investment destination.

External commercial borrowings (ECBs) and non-resident deposits, on the other hand, witnessed higher net inflows compared to the previous year. As of May 30, 2025, India’s foreign exchange reserves stood at US$ 691.5 billion. These are sufficient to fund more than 11 months of goods imports and about 96 percent of the external debt outstanding. Overall, India’s external sector remains resilient as key external sector vulnerability indicators continue to improve. We remain confident of meeting our external financing requirements.

Liquidity and Financial Market Conditions

A total amount of ₹9.5 lakh crore of durable liquidity was injected into the banking system in January. As a result, after remaining in deficit since mid-December, liquidity conditions transitioned to surplus at the end of March. This is also evident from the tepid response to daily VRR auctions36 and high SDF balances – the average daily balance during April-May amounted to ₹2.0 lakh crore.

Reflecting the improvement in liquidity conditions, the weighted average call rate (WACR) – the operating target of monetary policy – traded at the lower end of the LAF corridor since the last policy. The comfortable liquidity surplus in the banking system has further reinforced the transmission of policy repo rate cuts to short-term rates. However, we are yet to see a perceptible transmission in the credit market segment, though we must keep in mind that it happens with some lag.

The Reserve Bank remains committed to providing sufficient liquidity to the banking system. To further provide durable liquidity, it has been decided to reduce the cash reserve ratio (CRR) by 100 basis points (bps) to 3.0 percent of net demand and time liabilities (NDTL) in a staggered manner during the year. This reduction will be carried out in four equal tranches of 25 bps each with effect from the fortnights beginning September 6, October 4, November 1, and November 29, 2025.

The cut in CRR would release primary liquidity of about ₹2.5 lakh crore to the banking system by December 2025. Besides providing durable liquidity, it will reduce the cost of funding the banks, thereby helping in monetary policy transmission to the credit market. I would like to reiterate that we will continue to monitor the evolving liquidity and financial market conditions and proactively take further measures, as warranted.

The system-level financial parameters of Scheduled Commercial Banks (SCBs) continue to be robust. The asset quality parameters, liquidity buffers, and profitability parameters have shown further improvement. The credit Deposit ratio for the banking system at the end of December 2024 was 81.84 percent, broadly similar to a year ago. Similarly, the system-level parameters of NBFCs are also sound, with comfortable capital position and improved GNPA ratios.

The stress witnessed earlier in retail segments like unsecured personal loans and credit card receivables portfolios has abated, while the stress in the micro-finance segment is persisting. Banks and NBFCs active in these segments are already recalibrating their business models, strengthening their credit underwriting practices, and stepping up their collection efforts to avoid any excessive build-up of risks on this front in the future.

Concluding Remarks

On both inflation and growth fronts, the Indian economy is progressing well and broadly on expected lines. Strong macroeconomic fundamentals and a benign inflation outlook provide space for 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.

Here, I would like to highlight that there is no tussle between price stability and growth in the medium and long term. Price stability preserves purchasing power, imparts certainty to households and businesses in their savings and investment decisions, and ensures congenial interest rates and financial conditions, all of which foster consumption, investment, and overall activity. Moreover, it is crucial for equitable growth and shared prosperity because its absence is disproportionately burdensome on the poor.

I must also add that while price stability is a necessary condition, it is not sufficient to ensure growth. A supportive policy environment is vital. This is even more important during periods of high uncertainty, such as the current times. 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.

Conclusions

RBI is now cutting rates as headline CPI dips well below 4% targets, while India’s economic growth suffered some setbacks in FY25. India’s real GDP growth is now slowing towards a long-term trend of 6.0% from the 8.8% average in the last three years (post-COVID). Indian economy needs to grow at least 10.0% in real terms so that the headline unemployment rate falls below 5% on a durable basis from the present 8.0%. The Government should ensure proper core CPI and employment data and give the RBI and the Fed the dual mandate of maximum employment (say 95% of the labor force) and minimum price stability (say 3.0% core CPI target).

RBI, especially under the Modi admin, never finds any faults in India’s domestic economy. But the GDP-savvy Modi admin and also the RBI should now look into the employment situation in the country, as headline unemployment remains around 8.0%, while youth unemployment, underemployment, and disguised unemployment are much higher. Almost 42% of India’s educated youths are unemployed (below 25 years of age), indicating a significant mismatch in skills and jobs available. Although employment is primarily a fiscal policy issue, as a central bank, the RBI should also maintain stable lower prices for maximum employment (like the US Fed).

Lower price stability and higher real income will ensure higher discretionary consumer spending, which will result in higher private capex or business investments and quality jobs. India’s GDP growth is too dependent on higher government spending & consumption, while private consumption and capex growth remain weak. RBI and the government should focus on core GDP data (Private consumption + Investment/CAPEX) without cheerleading about headline GDP growth. India’s government spending is increasing at an alarming pace in public debt & liabilities, which is devaluing local currency (INR) over the years; USDINR is appreciating almost 5% on average, in line with headline inflation.

Although India’s core CPI was substantially below 4.0% in 2024 and total CPI was above 5.0% due to double-digit food inflation, RBI, under Das, didn’t cut rates as officially, RBI has the single mandate of price stability –inflation –total CPI target, not core CPI. Despite Goyal, an influential weight Minister of Commerce (Modi admin) criticizing Das publicly for not following core CPI in line with global norms, Das was adamant in his hawkish hold stance and held rates too high for too long, which may be blamed one of the primary reasons behind India’s economic slowdown in late 2024.

Das was subsequently not given his 3rd extension as RBI Governor, but due to his proximity with the PMO and an excellent track record as an Indian Bureaucrat and RBI Governor, he was eventually appointed as 2nd Principal Secretary of PM Modi. Das’s handling of monetary policies was excellent during COVID times and subsequently during the 2022-23 rate hikes to bring down inflation. But unlike developed economies such as the US, EU, or China, India’s inflation, especially on food, is often driven by supply shock due to various reasons, including adverse weather and regulations, rather than too much demand, which RBI needs to control with monetary policy tightening and higher borrowing costs.

Looking ahead, the Indian economy may face slower growth due to subdued domestic private consumption and a potential Trump trade war tantrum. India’s 3-month moving average (3MRA) of CPI is now around 3.4%, while core CPI is 4.1%. The recent uptick in core CPI is mainly due to higher Gold, while the sudden slump in total CPI is due to a fall in food/vegetable inflation from very high prices (base effect). RBI thinks that India’s headline and core inflation should be around the 4.0% target on a durable basis.

However, economic growth may be affected negatively due to Trump's trade & tariff war. RBI thinks that India may be less affected by the Trump trade war as, unlike China, India is not an export-heavy economy.  But as a proactive measure and correcting past policy mistakes, RBI cut 50 bps in June’25, and cumulatively cut 100 bps in CY25 so far, in line with the Fed’s 100 bps cut in H2CY24. RBI, under Governor Das, may have made a policy mistake by not cutting rates in H2CY24 despite India’s core CPI hovering around 3.3% and the Fed and ECB cutting rates proactively in anticipation of the Trump trade war.

India has a large informal economy coupled with widespread corruption involving public money and government fiscal stimulus. This, along with the steady devaluation of the local currency (INR) and the Goldinization of the economy, the RBI’s monetary policy has been largely ineffective in controlling India’s inflation for decades after decades. This is a legacy issue, not a particular RBI governor.

Due to excessive Government spending, fiscal stimulus leakage cut money. Corruption involving various infrastructure projects, a large section of the Indian population does not need to borrow money to support consumption, and thus RBI policy is largely ineffective. Also, most of the Indian banks & financial institutions are now too worried about the return of capital rather than return on capital, and thus lend to only qualified, eligible borrowers irrespective of the RBI policy. RBI also does not encourage excessive lending proactively and always keeps an owlish stance, warning banks. Thus, India’s core inflation largely hovers around 4.0% to 5.0%, even when the RBI cuts the rate.

Due to its huge population of almost 1.45 billion with a relatively younger demography, the demand is always high and increasing against a constrained or limited supply of the economy, especially for food items, which is a basic necessity. The government should have ensured a higher supply through proper policy reform, deregulation, and lower taxation. As a central bank, the RBI has the tool to control the demand side of the economy to manage inflation, not the supply side, which is solely the responsibility of the government (fiscal side action).

Bottom line

Considering India’s potential inflation & growth trajectory along with the elevated unemployment rate, RBI may bring down the repo rate gradually to 5.0% by FY26 (Feb’26) and 4.0% terminal rate by FY27 (Feb’27) against the Fed’s 3.0% and PBOC/China 3.0%. Going forward, the RBI may maintain the present policy rate differential of 1.00% with the Fed (5.50-4.50%) and may follow Fed rate cuts with a focus on domestic core inflation and real GDP growth trajectory, along with the employment situation in the country, at least unofficially. RBI may cut 25 bps for every alternate meeting from October 25 after a pause in August’25.

Market impact:

RBI rate cuts, i.e., lower borrowing costs, would be better for the overall Indian economy and stocks, especially interest-sensitive real estate, automobile, banks & financials, consumer durables, retail, infra, and even export-oriented sectors like pharma and IT services (higher USDINR). But at the same time, India’s imported inflation may rise as USDINR may scale the 90-93 range by Dec’26, if RBI indeed cuts repo rates to 4.0%. India’s Bank Nifty surged to a fresh life time high on the RBI bazooka.

The repo rate cut is expected to lower equated monthly installments (EMIs) for loans linked to external benchmark lending rates (EBLR), benefiting borrowers in sectors like housing and autos. Banks, such as Punjab National Bank (PNB), announced reductions in lending rates by up to 50 bps, effective June 9, 2025. The bond market saw confidence, with the 10-year G-Sec yield remaining soft at 6.19%. The Nifty Bank index rose over 500 points post-announcement, reflecting market optimism. RBI's move is being seen as growth-oriented and borrower-centric, with the CRR cut providing significant liquidity to support credit growth. These actions reflect the RBI’s proactive approach to bolstering economic growth while maintaining a cautious outlook on inflation and global uncertainties.

Nifty surged almost +1.71% in May; Nifty was dragged by the India-Pakistan mini-war and escalating Trump trade war, while boosted by the subsequent ceasefire, including the US-China tariff war pause. Nifty was also buoyed by hopes of an imminent trade deal between the US and India, which will be favorable (best-case scenario under the present circumstances).

India’s Nifty gained almost 3000 points in the last few weeks in hopes of a less hawkish Trump trade war on India and an accelerated trade deal (BTA) between India and the US. India’s Dalal Street was also influenced by Wall Street volatility amid the escalation and de-escalation of the US-China trade war. Dalal Street was dragged by Trump’s allegation of Geneva agreement violation by China, for not allowing the export of rare earth materials to the US, and again boosted after the Trump-Xi call on Thursday, June 5. On Monday, June 9, 2025, Dow Future, as well as Nifty Future, surged on hopes of US-China trade truce progress.

The Indian stock market was also boosted by hopes of an imminent trade deal with the US, India’s largest export destination. The announcement by U.S. Commerce Secretary Howard Lutnick on June 3, 2025, regarding progress in U.S.-India trade negotiations, with a potential deal in the “not-too-distant future,” is a significant development for India.

Lutnick said a trade deal between the U.S. and India could materialize in the “not-too-distant future,” citing strong progress in negotiations and mutual benefits. Speaking at a U.S.-India Strategic Partnership Forum summit, Lutnick noted, “We have found a place that works for both countries,” and suggested early participants in such deals tend to get “a better deal.” He praised India’s willingness to engage early and acknowledged ongoing talks. Lutnick reiterated concerns over India’s “very protectionist tariffs,” stating that reducing them is essential for building a “proper trading relationship.” He also called for reciprocal market access and a reduction in the trade deficit, expressing optimism that a balanced agreement could soon be reached.

The U.S. seeks lower Indian tariffs (up to 100% on some goods, e.g., agricultural products), greater market access for U.S. firms (in sectors like agriculture, medical devices, and financial services), and increased Indian purchases of U.S. defense equipment and oil & gas to reduce the U.S. trade deficit ($122.7 billion in goods and services in February 2025). India aims for relief from U.S. reciprocal tariffs (26% on Indian goods, including a 10% baseline tariff, and 50% on steel and aluminum) and preferential access to U.S. markets for sectors like textiles, gems and jewelry, leather, garments, plastics, chemicals, shrimp, oilseeds, grapes, and bananas.

Although India is not an export-heavy economy, the US is a vital source of USD amid a net trade surplus, huge remittances, and FDI. Thus, India needs to keep good trading and diplomatic relations with the US, along with China, Russia, and also EU/Europe for a balancing act. India’s total external debt (public + private) is now over $712B, while current account deficits are almost $12B against an FX reserve of around $ 700 B. Thus, India needs to keep the Trump administration in a good mood despite Trump’s ongoing bullying. Trump is also planning to impose a 5% tax on all types of remittances by non-US citizens, which can affect remittances from NRIs in the coming days. Looking ahead, India’s Nifty is expected to surge further in hopes of a favorable trade deal with the US and a fruitful trade negotiation meeting between US-China in London.

Technical outlook: Nifty Future, Bank Nifty Future, and USDINR

Looking ahead, whatever may be the fundamental narrative, technically Nifty Future (CMP: 25150) now has to sustain over 25300 for a further rally to 25500/25900-26100/26500; otherwise, sustaining below 25250-25000, Nifty Future may fall to 24600/23350*-23900/23750 and 23400*/23100-22600/22200 and further 22000-21700* the coming days.

Technically, Bank Nifty (57000) now has to sustain over 58000 for a further rally to 58500/58900-60500/61000 and a further 61500-65750 in the coming days; otherwise, sustaining below 57500, BNF may again fall towards 57000/56500-56000/54900 and 54500/54000-53500/53000 and 52500*-52000/51500 and further 51000/50500-50000/49700 and 49200-47700 in the coming days.

Technically, USDINR (85.70) now has to sustain over 85.00 for a rebound to 86.25*/86.75-87.50/89.00 and 90.00-92.75; on the flip side, side, sustaining below 84.50, USDINR may further fall to 84.00/83.50-83.00/82.50 in the coming days.