Weekly RBI Tracker: Surprisingly Strong Rate Cuts by RBI

9 Jun 2025 , 09:46 AM

RBI cuts rates more than expected. Changes stance to Neutral:

In a significant development, RBI cut its repo rate by 50bps. This takes the overall cut in repo rates in 2025 to 100bps. However, it has reverted back to a ‘Neutral’ stance from the current ‘Accommodative’ stance. This suggests that further rate cuts are unlikely. Also, the CRR has been cut by 100bps. Together, these indicate a strong effort by the RBI to improve the falling credit growth issue.

RBI’s Repo Rate Cut: A boost to credit growth demand

After having maintained the benchmark policy interest rate (repo rate) for more than a year, Reserve Bank of India (RBI) had cut the benchmark rates by 100bps in 2025. The latest cut of 50bps comes as a positive surprise vs expectation of 25bps. The cut is also significant as it takes the repo rate to levels that are at lows not seen since 2022.

After the latest cut, the repo rate is 5.5%. In addition, the RBI had also cut the CRR by 100bps. This was another positive surprise and is an additional incentive to lenders.

While the rate cuts have been surprising, there is another notable change in stance in RBI’s monetary policy. It has changed from ‘Accommodative’ to ‘Neutral’. In essence, this implies that further rate cuts are unlikely unless the growth surprises negatively.

Figure: Repo Rate cut was higher than expected

Source: RBI

What is Repo Rate – A Primer

The repo rate is the rate at which the RBI lends to commercial banks. A lower rate of interest reduces the cost of borrowing for banks and can ultimately mean lower interest rates for loans to consumers and businesses. It is the primary device employed by the RBI to manage the economic activity in the country.

Goals behind a cut in the Repo Rate

Encouraging Credit Demand: By making borrowing cheaper, it encourages households, firms to borrow and spend on consumption and investment goods. That can be particularly good for rate sensitive areas like housing, auto and small business.

Boosting The Economy: Economists say Reserve Bank of India’s cut will help lift economic activity by bringing down the cost of spending and investment.

Inflation Management: The RBI’s move to reduce the repo rate comes against the backdrop of inflation moderating particularly in food prices. Retail inflation dropped, giving the central bank a room to have a more accommodative stance without actually contravening its inflation targets.

Boost Liquidity: The rate reduction is combined with steps to provide liquidity to the banking system, so banks have the required cash to lend more money.

 

Forex Reserves stabilise. Gold reserves increase further:

As per the latest RBI data, India’s forex reserves decreased by USD 1.25 bn week over week to USD 691.5 bn. The decrease is mostly due to a decrease in foreign currency assets. After having increased by a sharp USD 4.5 bn in the prior week, they moderated by USD 1.9 bn to USD 584.2 bn this week. Foreign currency assets are the largest component in forex reserves and contribute to more than 80%.

On the other hand, Gold reserves continued to increase. The increase by another USD 700 m to reach USD 84.3 bn. The share of gold in forex reserves has increased due to its sharp appreciation of the past 1 year. In 2025, while gold accounts for only 12% of total reserves, it contributed to 25% of incremental reserves.

Figure: Gold Bounced Back. Foreign Currency Assets Increase Sharply

Source: RBI

Credit Growth Continues to Dip. Deposit growth also moderates to below 10%:

As per the last release of fortnightly credit growth data, banking credit had shown a further deterioration. For the first time in three years, banking credit growth had dipped below 10% in early May. Credit growth data for the week ended 16^th of May showed that it has dipped further to 9.8% (from 9.9%).

It seems like despite RBI’s lowering of repo rate, transmission of lower interest rates and a pickup in credit growth has not happened. In that regard, the latest aggressive repo rate cut and lowering of CRR should accelerate the transmission. As lower interest rates are passed on, credit growth trends will also likely improve.

A quick recap of India’s credit growth is that the conditions were excessively “hot” last year. During 2024, banking credit had jumped 20% on a year-on-year basis, supported by strong demand from corporates, retail borrowers as well as from services sector. The high pace was unsustainable and carried risks of asset quality deterioration and overheating in pockets of the economy.

A slowdown in both retail and corporate credit resulted in the current slowdown. A variety of factors including tighter norms for NBFC credit and unsecured retail credit (credit cards, personal loans etc) are being attributed to. While a moderation was expected, the sharp fall is increasingly a cause for worry.

Figure: Credit Growth had dipped to a 3-year low. Slower than deposit growth now

Source: RBI

 

Banks continue to park their money in SDF:

As per RBI’s latest release, SDF balances have increased to their highest level in the year. A rapid acceleration in the RBI’s daily SDF started in April 2025. In April 2025, 20D average SDF utilization has increased to nearly INR 2 trn – a high not seen since 2022. This rise resulted in overall liquidity conditions tightening after the improving conditions witnessed during the early part of 2025. Subsequently, they had moderated to less than INR 1trn in the 3^rd week of April. However, an analysis of recent data, shows that they have increased again and have crossed INR 2trn.

Figure: SDF utilization continues to be high

Source: RBI

What is SDF – A Primer

The SDF is a non-collateralised instrument which the banks can use for parking their surplus funds at the RBI and earn interest at a slightly lower rate than the repo. It was implemented in April 2022 as a cleaner and more efficient alternative to the conventional reverse repo.

Unlike reverse repo, the SDF does not mandate the RBI to transfer government securities as collateral, making it a more efficient tool to absorb liquidity. This has now become the de-facto floor of the RBI’s LAF corridor.

 

Credit Deposit Ratio – No longer a worry:

Not too long ago, credit deposit ratio was a closely watched metric as banks competed to raise deposits to meet the strong credit growth. However, the narrative on liquidity in banking has changed significantly. As credit growth slowed, banks are no longer worried about tight liquidity conditions.

As per latest RBI data, CDR has moderated from its recent peak to ~78%. A moderating CDR indicates either the relative pace of credit slowed, or deposits picked up or a combination of both happened. A closer look at the net liquidity in the system indicates that the banks parked excess funds in low interest earnings SDF facilities as the demand for credit moderated.

Figure: Credit Deposit Ratio Drops

Source: RBI