The Reserve Bank of India (RBI) jolted financial markets today, announcing a sharp 50 basis point (bps) reduction in the repo rate to 5.50%—doubling most analysts’ expectations. Governor Sanjay Malhotra’s third consecutive cut in 2025 aims to counter global headwinds but triggered an immediate Sensex decline of 255 points and pushed Nifty below 24,700 as investors digested persistent inflation risks.
Why the Aggressive Move?
The Monetary Policy Committee (MPC), voting unanimously, slashed rates citing:
- Subdued inflation: April CPI hit a six-year low of 3.16%, comfortably within RBI’s 2–4% target band.
- Growth concerns: FY25 GDP growth slowed to 6.5%—a four-year low—despite Q4’s 7.4% rebound.
- Global fragility: Malhotra warned of “downward revisions in global growth and trade projections,” exacerbated by U.S. tariff policies and capital flow volatility.
Table: RBI’s Rate Cut Trajectory (2025)
| Meeting Date | Repo Rate | Change |
|---|---|---|
| February 2025 | 6.25% | -25 bps |
| April 2025 | 6.00% | -25 bps |
| June 2025 | 5.50% | -50 bps |
“The last mile of inflation is turning out to be more protracted”
– Governor Malhotra, highlighting core price pressures despite recent dips.
Market Turmoil: Sensex, Nifty Tumble
Pre-announcement optimism evaporated within minutes of Malhotra’s speech:
- Sensex nosedived 255 points to 81,186, while Nifty dropped 0.23% to 24,692.
- Banking stocks led losses: ICICI Bank, HDFC Bank, and Axis Bank fell 1.5–2% on margin compression fears.
- Rupee weakened to 85.91/USD amid concerns over capital outflows.
Analysts attributed the sell-off to:
- Sticker shock: Markets priced in only 25 bps; the double-sized cut signaled deeper economic worries.
- Dovish but cautious tone: Malhotra’s emphasis on “financial stability challenges” and AI-driven disruptions unnerved investors.
- Liquidity surplus: Despite ₹1.5 lakh crore excess funds, transmission to borrowers remains sluggish.
Sectoral Impact: Real Estate Cheers, Savers Fret
- Real estate/housing loans: Developers hailed the cut as “transformative” for affordable housing demand. Basic Home Loan’s Atul Monga predicts “improved affordability and long-term momentum”.
- Fixed deposits: Banks may trim FD rates further, following April’s reductions (e.g., SBI down 20 bps).
- Corporate borrowing: MSMEs and infrastructure firms gain via cheaper capital, though global trade risks loom.
What’s Next?
The RBI retained FY26 GDP growth at 6.5% but hinted at more cuts if inflation stays benign:
- Morgan Stanley forecasts 100 bps total easing in 2025, potentially lowering rates to 5%.
- Inflation vigilance: Monsoon progress and food prices (especially cereals/pulses) remain wild cards.
- Global spillovers: U.S. rate decisions and July’s tariff expiry could force RBI recalibration.
The Bottom Line
Today’s bold rate cut underscores RBI’s pivot from inflation-fighting to growth rescue mode. While borrowers gain relief, markets reacted with skepticism—reflecting doubts about policy efficacy amid global instability. For investors, volatility in rate-sensitive sectors (banking, autos, realty) will persist until inflation’s “last mile” is conquered.
“A 50 bps cut is an insurance against growth faltering”
– Morgan Stanley’s note, justifying aggressive easing.
FAQ: RBI’s 50 BPS Rate Cut & Market Impact
Q1: Why did the RBI cut rates by 50 bps instead of 25 bps?
A: The double-sized cut (to 5.50%) aims to counter slowing GDP growth (6.5% in FY25) and global economic fragility. Despite April’s low inflation (3.16%), the RBI prioritized stimulating growth amid trade disruptions and capital flow volatility.
Q2: Why did Sensex fall 255 points after a rate cut?
A: Markets reacted negatively because:
1. The 50 bps cut exceeded expectations (priced for 25 bps), signaling deeper economic concerns.
2. Governor Malhotra highlighted persistent “last-mile” inflation risks and AI-driven financial instability.
3. Banking stocks plunged over fears of margin compression.
Q3: How will this affect home loan borrowers?
A: Borrowers gain significantly:
1. Banks will lower lending rates, reducing EMIs.
2. Affordable housing demand may surge (e.g., developers call this “transformative”).
3. Note: Full transmission may take 1-2 months as banks adjust.
Q4: Should fixed deposit (FD) investors worry?
A: Yes. Banks will likely cut FD rates further (e.g., SBI already reduced rates by 20 bps in April). Investors may need to explore debt mutual funds or sovereign bonds for better returns.
Q5: What does “repo rate at 5.50%” mean?
A: The repo rate is the RBI’s lending rate to commercial banks. A lower rate (5.50% vs 6.00% earlier) makes borrowing cheaper for banks, encouraging them to lend more to businesses/consumers.