What to expect from June 2025 RBI Monetary Policy?

4 Jun 2025 , 11:13 AM

CONTEXT WILL BE FY25 GDP AND FISCAL DEFICIT DATA

Every monetary policy announcement has a context. In the monetary policies of February and April, it was all about Trump Trade and reciprocal tariffs. Those things are now part of the narrative. In June, the GDP data and fiscal deficit data announced on the last day of May assume significance. First the numbers. FY25 GDP grew at 6.5%, but what was gratifying was that Q4FY25 GDP grew much quicker at 7.4%. On the fiscal deficit front, there was an overshooting of fiscal deficit in absolute terms, but thanks to higher nominal GDP, the fiscal deficit was still under the targeted 4.8% of GDP for FY25.

How would the GDP data and the fiscal deficit data influence the June policy? The GDP data has shown that a small push by the government to capex spending made a big difference to high-frequency GDP growth. The missing link is consumer spending, which can be boosted with lower interest rates. For FY26, while fiscal deficit is targeted at 4.4% of GDP, the total borrowings are likely to be relatively high. Hence, lower cost of borrowing will go a long way in boosting consumer confidence and consumer spending; as well as allowing the government to complete its fiscal deficit funding at a lower relative cost. That is the context!

RECAP OF KEY ANNOUNCEMENTS OF APR-25 MONETARY POLICY

Here are some of the key highlights of the April 2025 policy statement.

• After cutting repo rates by 25 bps in Feb-25, RBI MPC cut rates by another 25 bps in Apr-25 from 6.25% to 6.00%. The SDF rate and bank rate also went down 25 bps in tandem.
• The FY26 GDP growth estimate, which was pegged at 6.7% in Feb-25 policy, was further cut by 20 bps to 6.5%, to reflect the uncertainty created by reciprocal tariffs.
• In Feb-25, the CPI inflation estimate for FY25 were cut sharply by 60 bps from 4.8% to 4.2%. In April 2025, inflation estimate for FY26 was cut by another 20 bps to 4.0%.

Let us quickly turn to the key expectations from the June 2025 monetary policy.

1.WILL RBI CUT 25 BPS OR 50 BPS IN JUNE 2025?

After a 25 bps repo rate cut in Feb-25 and another 25 bps cut in Apr-25, the dilemma in June is whether the RBI should cut rates by 25 bps or 50 bps. While the market consensus is that the RBI would restrict itself to another 25 bps rate cut, some economists feel there is merit in a 50 bps rate cut. With the GDP showing traction in Q4FY25 and the need to keep borrowing costs low, the perception is that a 50 bps rate cut would be more effective in spurring growth. However, that would also reduce the options in front of the RBI if inflation was to spike post tariffs. RBI may do 25 bps now and wait for the outcome of the Indo-US trade deal to take up the next tranche of rate cut.

2. HOW WILL RBI HANDLE THE LIQUIDITY SITUATION?

The liquidity is likely to remain in surplus for a better part of FY26. The system liquidity is already in surplus mode to the tune of ₹1.20 Trillion, and the RBI dividend will add another ₹2.70 Trillion to the liquidity in the system. Hence, the year is more likely to be about the RBI conducting open market operations (OMO) to absorb surplus liquidity. However, it must be noted that in the Apr-25 policy, the RBI had shifted the stance from “Neutral” to “Accommodative”. Hence, the liquidity will be maintained in surplus mode so that it is in tune with the broad stance of the monetary policy.

3. WILL RBI CHANGE ITS ESTIMATES FOR GDP AND INFLATION?

Let us look at the GDP estimates first. In the Apr-25 RBI policy, the GDP estimates had been cut by 20 bps from 6.7% to 6.5% to reflect tariff risks. However, India is largely a domestic demand driven economy and there are expectations of above average rainfall this year. That could only add to the farm output, which was already the star performer of FY25. Hence, the RBI may wait for greater clarity on tariffs and FTAs with the US before taking a call. On the subject of inflation, it has already been cut from 4.8% to 4.0% between February and April policies. While average inflation is running around 3.8%, the RBI may prefer to wait and watch, before taking any stand on reducing inflation estimate for FY26.

The 3-day RBI MPC meet commences on June 04, 2025 and will culminate in the announcement of the RBI Monetary Policy on June 06, 2025. The big question is whether the RBI will bite the bullet and go all out for a 50 bps rate cut; or whether it would play it safe and cut rates by 25 bps. That will give the RBI better policy leverage!