The big beautiful monetary policy

RBI Governor Sanjay Malhotra

RBI governor Sanjay Malhotra has delivered a ' Big Beautiful Monetary Policy' cutting the repo rate by 50 basis points as against the consensus estimate of 25 bps. The CRR cut is an unexpected 100 bps, to be implemented in four tranches. And while US President Donald Trump’s Big Beautiful Bill may be facing headwinds---most recently and famously from Elon Musk---the monetary policy received a thumbs-up from the Indian market.

On June 6, the Nifty 50 rose 217 points and the Nifty Bank index by 818 points-- the latter being explained by the fact that while net interest margins of Indian banks will be compressed, total lendable resources will increase. The CRR cut can inject as much as Rs 2.5 lakh crore of liquidity. This is over and above the Rs 9.5 lakh crore of liquidity that has been infused into the system since January this year. The greater than expected easing could act as a tailwind for the equity markets, at least in the short term, leading to a wealth effect which could spur consumption.

All in for economic growth

A reading of the governor's statement and press release indicates that the thrust of monetary policy is to go all in on growth, which was a positive surprise for the markets.  "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," Governor Malhotra said.

The governor goes on to say that while price stability is a necessary condition for growth it is not a sufficient condition. What is needed is a "supportive policy environment".

The word aspiration --- in relation to GDP growth---is prominent in the RBI’s communication.  The press release on the MPC's deliberation says that growth "remains lower than our aspirations" amidst a challenging global environment.

The intention of policy is thus to spur capex and domestic private consumption "through policy levers" to boost growth. However, the ability of monetary policy to do these things is also limited, going forward.

"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 the stance from accommodative to neutral," as per the monetary policy statement.

The neutral stance is widely understood to mean that no cuts will happen in the next two MPC meetings, in August and December. The terminal rate of this phase of the rate-cutting cycle is likely to be either 5.25 or 5%.

Notably the RBI has maintained its growth estimate for 2025-26 at 6.5% despite the greater than expected rate cut.

Capex level set to decline in FY26

Will the front loading of interest rate cuts help boost growth? Intended capex was Rs 6.6 lakh crore in FY 24-25, sharply higher than the actual capex of Rs 4.2 lakh crore in 2023-24, as per the finance ministry's economic report for April 2025.

However, intended capex in 2025-26, the current fiscal, was sharply lower, at Rs 4.9 lakh crore. Capacity utilisation for the fourth quarter of 2024-25 was 75-5%, slightly higher than the long-period average of 73.9%, as per the monetary policy. IIP growth in fiscal 2024-25 came in at a subdued 4%.

Credit growth for scheduled commercial banks was 10.9% as on May 2, 2025, compared to 15.9 % a year ago due to "weaker momentum and an unfavourable base effect" according to the RBI's latest monthly bulletin.

Given these somewhat middling numbers the steeper than expected cut in rates was surely the right decision. More so as inflation is now well below 4%, the mid-point of the RBI's  2-6% range set by law. It will likely boost real estate and construction, two of the economy's bright spots in the recent past. Whether it will trigger a wider revival in capex remains to be seen. In his statement the governor referred to the strong balance sheets of corporates, banks, households, government, and external sector.

But a major pick up in capex depends on demand going up significantly, resulting in higher capacity utilisation. The risks, to use the RBI's parlance, are evenly balanced.