BOLD MONETARY POLICY ANNOUNCEMENT BY RESERVE BANK OF INDIA (  6th JUNE 2025 )   CA  A. K. Jain On the backdrop of prevailing economic concerns, Reserve Bank of India Governor Sanjay Malhotra has taken a bold and decisive step by announcing a reduction in the Repo Rate by 0.5% (50 basis points) and a reduction in the Cash Reserve Ratio (CRR) by 1% (100 basis points). This significant move is expected to have wide-ranging implications across the Indian economy. While it aims to stimulate growth and liquidity, it also carries certain risks and trade-offs. Positive Impacts of the Policy 1. Boost to Economic Growth : The reduction in the repo rate - the rate at which the RBI lends money to commercial banks - directly lowers borrowing costs for banks. This encourages banks to extend more credit to businesses and individuals, potentially leading to increased investments, consumer spending, and overall economic activity. 2. Increased Liquidity in the Banking System :  The 1% cut in CRR, which is the proportion of deposits banks must hold as reserves with the RBI, will release a substantial amount of funds into the banking system. This will significantly enhance liquidity, enabling banks to lend more freely, thereby injecting more capital into the productive sectors of the economy. 3. Encouragement to Industry and MSMEs : Lower interest rates make borrowing cheaper for industries, particularly Micro, Small and Medium Enterprises (MSMEs), which often face financial constraints. This can lead to higher industrial output, job creation, and enhanced competitiveness. 4. Support to Real Estate and Infrastructure Sectors : These sectors, which are capital intensive, stand to benefit greatly as reduced interest rates lower the cost of financing large projects. Increased availability of credit can revive stalled projects and attract new investments. 5. Relief to Retail Borrowers : Home loans, car loans, and personal loans are likely to become cheaper. This will improve consumer sentiment and spending power, particularly in urban middle-class households, potentially leading to a consumption-driven recovery. 6. Revival of the Stock Market : With increased liquidity and optimism around credit growth, investor sentiment is likely to improve. Lower interest rates also make equities more attractive compared to fixed-income instruments, potentially driving stock market indices higher. 7. Strengthening of Banks' Lending Capacity : With both more liquidity and a lower cost of funds, banks will have stronger incentives and tools to increase their credit outreach, especially to priority sectors like agriculture, housing, and small enterprises. Negative Impacts and Risks of the Policy 1. Inflationary Pressures : A sharp increase in liquidity and consumer demand can trigger inflation, especially if supply chains are not responsive or if the economy is already running at near capacity. Imported inflation ( from rising oil or commodity prices ) can worsen the situation. 2. Reduced Returns for Savers : A cut in repo rate usually results in lower deposit interest rates offered by banks. This adversely affects fixed income investors, especially senior citizens and pensioners who depend on interest income for their livelihood. 3. Risk of Asset Bubbles : Excessive liquidity and cheap credit can lead to speculative investments in asset markets like real estate or equities, potentially creating unsustainable asset bubbles that can burst and damage financial stability. 4. Bank Profitability Challenges : Banks may face a margin squeeze if the reduction in lending rates outpaces the fall in deposit rates. This could affect their profitability, especially if credit growth does not pick up quickly. 5. Transmission Delays : There is often a lag between the RBI’s rate cuts and the actual reduction in lending rates by banks. Structural inefficiencies, existing NPAs (Non-Performing Assets), and cautious lending behavior may delay or dilute the policy’s intended impact. 6. External Sector Vulnerability : Lower interest rates can make Indian financial assets less attractive to foreign investors, potentially leading to capital outflows and putting pressure on the Indian Rupee. This may also affect the current account and foreign exchange reserves. 7. Fiscal Policy Dependence : While monetary policy is being aggressive, the economy also needs matching fiscal measures to revive demand, employment, and infrastructure. Monetary measures alone cannot lift the economy unless accompanied by effective government spending and policy reforms. Conclusion The bold monetary policy announced by the RBI reflects a strong commitment to revive growth in the face of sluggish demand and global uncertainties. The simultaneous reduction in the repo rate and CRR is expected to ease financial conditions significantly, support credit expansion, and revive investment sentiment. However, these benefits come with inherent risks related to inflation, financial stability, and banking sector stress. It is essential that this policy is accompanied by prudent fiscal management, structural reforms, and strong regulatory oversight to ensure that the benefits of this initiative are sustainable and inclusive. The onus is now on both the banking sector and the government to leverage this monetary stimulus wisely for long-term economic stability and growth. RBI and Past Rate Cut Experiences On the backdrop of prevailing economic uncertainty and the need to stimulate economic growth, the Reserve Bank of India (RBI) has taken a bold monetary step by reducing the repo rate by 0.5% (50 basis points) and cutting the Cash Reserve Ratio (CRR) by 1% (100 basis points). This combined step is aimed at lowering borrowing costs and increasing liquidity in the banking system, with the broader goal of reviving economic momentum. While the immediate objective is growth stimulation, it is important to understand the full spectrum of positive and negative impacts, and also learn from historical examples when similar moves were undertaken in the past by RBI. Positive Impacts of the Current Policy 1. Lower Borrowing Costs : Reduction in repo rate makes loans cheaper for banks and consumers, encouraging borrowing for investment and consumption. 2. Enhanced Liquidity : Reduction in CRR releases more funds with banks, allowing them to lend more freely and improve credit flow in the economy. 3. Boost to Investments and Industry : With cheaper capital available, sectors like manufacturing, MSMEs, infrastructure, and real estate could witness improved activity and employment. 4. Relief for Existing Borrowers : EMI burdens on home loans, vehicle loans, and other borrowings may reduce, improving disposable income and consumption. 5. Improved Stock Market Sentiment : Liquidity infusion and growth expectations generally buoy equity markets, attracting domestic and foreign investors. Negative Impacts and Risks 1. Inflation Concerns : More money chasing the same goods and services can lead to inflation, especially in food and fuel, impacting the common man. 2. Low Returns for Depositors : Deposit rates are likely to fall, hurting senior citizens and conservative investors who depend on interest income. 3. Banking Sector Profitability : If deposit rates don’t fall proportionately, or if lending picks up slowly, banks could face a squeeze in profit margins. 4. Delayed Transmission : Banks often delay passing the benefits of lower repo rates to borrowers, especially if their balance sheets are weak. 5. Risk of Asset Price Inflation : Cheap money may create speculative bubbles in real estate and stock markets if not channeled into productive sectors. Past Experiences: What History Tells Us The Reserve Bank of India has used similar policy tools in the past to stimulate the economy. These episodes offer useful insights into what we can expect from the current move : 1. Global Financial Crisis (2008-09) • Repo rate was reduced from 9.0% in August 2008 to 4.75% by April 2009. • CRR was reduced from 9.0% to 5.0% during the same period. Impact : • Banks were flushed with liquidity. • Interest rates on loans declined. • The Indian economy avoided a deep recession, with GDP bouncing back to over 8% in 2009-10. • However, inflation rose sharply in subsequent years, especially food inflation, prompting RBI to raise rates again. 2. Demonetization Shock (2016-17) • Post demonetization (Nov 2016), RBI cut the repo rate from 6.75% to 6.25% and maintained CRR at 4% but infused liquidity through other means. Impact : • Liquidity surged due to excess cash deposits. • Demand remained subdued despite low rates due to loss of cash in the informal economy. • Inflation remained under control, giving RBI further room to reduce rates later. 3. COVID-19 Pandemic (2020) • In March-May 2020, RBI cut repo rate from 5.15% to 4.0%. • CRR was reduced from 4% to 3% to inject over Rs. 1.37 lakh crore liquidity. Impact : • Credit flows improved slightly, especially for large and medium enterprises. • Banks were hesitant to lend to small and risk-prone borrowers. • GDP contracted (-7.3%) in FY21 due to lockdowns, but recovery picked up strongly in FY22, supported by the liquidity boost. • Real estate, MSMEs, and infrastructure sectors benefitted greatly from soft loans and moratoriums. Conclusion : A Bold, Yet Measured Gamble The current move by the RBI echoes past responses to crisis-like situations-particularly 2008 and 2020-where aggressive easing helped arrest economic slowdown and revive demand. Given the past success of monetary easing, this strategy holds strong promise-if accompanied by effective fiscal measures, improved governance, and faster policy execution. However, the risk of inflation, banking sector stress, and uneven credit transmission remains a concern. Past lessons suggest that monetary policy alone cannot revive growth unless supported by : • Structural reforms, • Capital expenditure by the government, • Financial sector health restoration. In summary, RBI's bold decision is timely and potentially transformative, but it must be managed carefully to avoid inflationary consequences and financial instability-learning from both the successes and limitations of past interventions. ---------------------------------------------------- CA Anil Kumar Jain Email : caindia@hotmail.com Cell : +91 98 100 46108 ----------------------------------------------------