Repo rate cut to give a leg-up to private sector investments: MPC minutes

The monetary policy committee (MPC) voted for a 50 basis points repo rate cut in its last meeting to give a leg-up to private sector investments, which have been weak despite high capacity utilisation and improved corporate balance sheets, and revive consumption demand.

The six-member MPC, which met from June 4-6, voted by a 5-1 majority for a front-loaded policy repo rate reduction from 6 per cent to 5.5 per cent amid a benign inflationary outlook, even as they changed the monetary policy stance to “neutral” from “accommodative”.

The RBI, on its part, had announced a cut in the cash reserve ratio from 4 per cent to 3 per cent in four tranches of 25 bps each from September onwards.

Governor Sanjay Malhotra, in his comments at the MPC, noted that the post-Covid recovery so far has been largely led by public investments, while private sector investments have been weak despite high capacity utilisation and improved corporate balance sheets.

Moreover, heightened global uncertainties may put on hold investment decisions by businesses, underscoring the need for growth supportive policies, per the MPC minutes released by the RBI.

‘It is expected that the front-loaded rate action, along with certainty on the liquidity front, would send a clear signal to the economic agents, thereby supporting consumption and investment through lower cost of borrowing,” Malhotra said.

He underscored that a neutral stance would provide monetary policy the necessary flexibility to cut, pause or hike the policy rate in response to the evolving domestic and global economic conditions.

Policy support

Poonam Gupta, Deputy Governor, emphasised that there is both a need as well as the room for monetary policy to provide support to the economy in order for it to attain and even surpass the past rates of growth.

“The front-loaded 50 bps rate cut should help in fostering policy certainty and faster transmission than a staggered rate cut, and in more effectively countering the challenges emanating from the global economy,” she said.

Rajiv Ranjan, Executive Director, observed that domestic investment though on a recovery mode continues to suffer as enhanced global uncertainties are restraining investment impulses.

He cautioned that deflation in China is a pressure point and a possible threat to our manufacturing, which could further dampen investment sentiments. Thus, there is a strong case to support aggregate demand through a frontloaded rate cut.

Further, as monetary policy works with a lag, under the current circumstances, a 50-bps cut is preferable to two 25 bps cut for faster and greater transmission.

“On the global front, the outlook in 2025 continues to be disconcerting, even as trade policy uncertainty has somewhat ebbed since April. Amidst such global uncertainties, it would be appropriate to provide some certainty on the domestic rate and liquidity front so that agents do not delay and postpone their decisions,” Ranjan said.

Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi, noted that private investment, especially in manufacturing, and urban consumption, have continued to remain subdued.

“It is not clear that the growth momentum will continue in the Q1 of the current year, given the fact that consumption and investment growth is moderating. The survey of corporate performance shows that companies are deleveraging their balance sheets with rising profits.

“Despite the capacity utilisation crossing beyond 75 per cent, the investment intentions in manufacturing have moderated in 2025-26,” he said.

Kumar cautioned that the difficult external environment is likely to further complicate the economic growth outlook for 2025-26, especially for the manufacturing sector outlook, with implications for job creation. It calls for supporting growth through both fiscal and monetary policy.

He emphasised that a double dose of rate cut is likely to bring down lending rates significantly, helping to spur the investment and consumption of durable goods.

Saugata Bhattacharya, Economist, Mumbai, who was the only MPC member to vote for a 25 bps rate cut, said phrases related to “uncertain” and “volatility” occur in the MPC statement 6 times.

“This continuing elevated uncertainty remains, to my mind, the primary reason to exercise caution in pacing monetary policy easing.

“I believe that the RBI’s assurance of continuing large durable liquidity support is likely to have a more dominant effect on further transmission compared to a deep cut in the repo rate,” he said.

Ram Singh, Director, Delhi School of Economics, Delhi, observed that the GDP growth rate remains below the aspirational levels of 7-8% – the RBI’s and the Government’s forecast for the GDP growth rate for FY 2025-26 is 6.5%.

“Given the prospect of benign inflation, there is a strong case for the rate cut to provide a helping hand to growth….Even if we go by the post-pandemic average neutral interest rate (1.65%), there is scope for about a 75 bps cut in the current cycle without heating the economy,” he said.

Singh underscored that the expectation of further rate cuts has likely delayed the materialisation of demand and investment decisions.

In such an environment, given the market expectation of a 50-bps rate cut in this cycle, a staggered rate cut can further delay the materialisation of demand and investment decisions, he cautioned.

By contrast, a front-loaded 50-bps cut in the policy rate is likely to help achieve the twin objectives of supporting demand and growth by reducing the cost of funds for borrowers.

Published on June 20, 2025