With Inflation at a Six-year Low, the RBI is Planning Its Next Move Carefully

India’s monetary policy could soon shift toward lower interest rates as inflation drops to a six-year low.

In June 2025, the Reserve Bank of India (RBI) announced that retail inflation had fallen to 2.10 per cent, surprising economists who expected a slower decline. This drop, seen in the Consumer Price Index (CPI), offers relief for consumers.

However, the RBI is taking a cautious approach. Policymakers say they will wait to see if the trend continues before deciding on any rate cuts.

Price Drop May Not Be Enough

The RBI’s Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, has taken a neutral stance. During a televised interaction on CNBC-TV18, Malhotra clarified that the current policy position allows both tightening and easing.

He added that inflation continuing near or below 3 per cent, or a visible slowdown in economic activity, could justify another rate cut.

In his words, “The stance allows flexibility. If inflation stays low or growth weakens, it gives us room.”

While food inflation was mainly behind the sharp fall in overall prices, the central bank is looking beyond short-term numbers.

Officials want to ensure that this dip is not temporary. The central bank’s June bulletin revised the full-year inflation forecast to 3.7 per cent, compared to the earlier estimate of around 4.1 per cent.

The revised figures reflect stronger-than-expected food supply and falling fuel prices. However, external risks, such as rising crude prices or poor monsoon performance, could alter the trend.

Signs of Slowdown in Spending

RBI is also monitoring growth carefully. According to the latest report released in July 2025 by the Ministry of Statistics and Programme Implementation, India’s GDP growth rate fell to 6.5 per cent for FY25. This is the slowest pace in four years.

The slowdown is clear in real estate, small factories, and household spending. Some economists now want the RBI to cut rates more sharply to increase demand.

Read More - RBI May Deliver Final 25 bps Rate Cut in December

The central bank has already made three rate cuts this year, lowering the repo rate from 6 per cent in February to 5 per cent by June. These actions were taken in response to inflation falling consistently for four months.

Here’s how the repo rate changed over 2025:

Month	Rate Cut (basis points)	New Repo Rate (%)
February	25	6.25%
April	25	6%
June	50	5.50%

However, the full benefits of these cuts have not yet reached borrowers. According to internal RBI estimates, only 24 basis points of the repo cuts had been passed on to new loans by the end of May.

For existing borrowers, the figure is even lower at 16 basis points.

Tools Under Review

Beyond rates, the RBI is also reviewing its liquidity tools. During the same interaction, Governor Malhotra confirmed that a working group was studying the use of instruments such as the Cash Reserve Ratio (CRR) and the Variable Rate Reverse Repo (VRRR).

Mr. Malhotra said that cutting the CRR doesn’t happen often, but a small change was made earlier this year. A report on this is expected by the end of the month.

At the same time, the RBI has used VRRR operations to keep short-term borrowing rates steady and in line with the repo rate. This helps avoid sudden changes in borrowing costs.

Here is a brief look at liquidity operations this year:

Tool Used	Definition	Objective	Action Taken (2025)
CRR	Cash Reserve Ratio is the percentage of a bank’s total deposits that it must keep with the Reserve Bank of India (RBI) in cash.	Liquidity withdrawal buffer	1% reduction in June
VRRR	Variable Rate Reverse Repo is a tool the RBI uses to absorb extra money from the banking system by borrowing it from banks at a set interest rate for a short period.	Short-term rate management	Daily operations
MSF	Marginal Standing Facility is a way for banks to borrow emergency funds from the RBI, usually overnight, when they are short on money.	Emergency borrowing by banks	Rate unchanged

The RBI's plan to manage money flow is meant to keep banks stable and make sure loans are available for housing, small businesses, and infrastructure projects.

Policy is Not Just About Rates

Governor Malhotra also touched on another issue not widely reported. He confirmed that the central bank is reviewing the ownership guidelines for Indian banks.

According to him, the RBI is reconsidering its cap of 26 per cent for foreign stakes in banks, especially for long-term investment partners.

However, Malhotra dismissed the idea of allowing large industrial houses to own banks. This position reflects earlier warnings on risks linked to concentrated ownership.

A summary of the banking reforms under study:

Subject Area	Current Policy	Being Reviewed
Foreign Stake Limit	Capped at 26%	May raise for DFIs
Business Group Entry	Not allowed	No change is planned.
Bank Licensing Format	On-tap model (2016 onwards)	May be updated

These regulatory updates are likely to influence both market entry and investor appetite in the banking sector.

What to Expect in The Coming Months

The next meeting of the Monetary Policy Committee (MPC) is set to take place from August 4 to 6. Experts believe that the Reserve Bank of India (RBI) may wait and watch for one more month to see if inflation stays below 3 per cent before making any new decisions on interest rates.

However, if there is a weak monsoon or food prices rise again, it could delay any plans to cut rates further.

Even so, because the economy is slowing down and retail prices are coming down, there is still a chance that the RBI may reduce interest rates again before the end of the year.

As India deals with uncertain global conditions, the RBI’s future decisions will depend on whether inflation remains low and how fast the economy picks up again.

The months of July and August will play an important role in shaping that direction.

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