India's central bank unexpectedly cuts interest rate by 50 basis points! It changes its monetary policy stance to "neutral".

On Friday (June 6), the Reserve Bank of India (RBI) significantly reduced its benchmark policy interest rate, cutting it by 50 basis points from 6% to 5.5%, the lowest level since August 2022. The new interest rate is below the median expectation of 5.75% from a media survey, marking the third consecutive interest rate cut by the RBI since February.

RBI Governor Sanjay Malhotra explained at a press conference that the central bank chose to implement this interest rate cut in light of the significant slowdown in inflation and economic growth that is "below our expectations" amid a challenging global environment and heightened uncertainties.

He also announced that the RBI had decided to reduce the reserve requirement ratio (RRR) by 100 basis points to 3%.

Following the unexpected interest rate cut by the RBI, the Indian stock market surged, reversing an opening decline of 0.3% to a current gain of 0.87%. Additionally, the country's Nifty Bank Index also rose by 0.95%, as the reduction in the RRR is expected to free up more capital for the central bank to boost credit.

Monetary policy stance adjusted to neutral

India's inflation is largely on a downward trend, providing the RBI with room to cut interest rates. The latest headline inflation rate in April was 3.16%, the lowest level since July 2019.

The RBI had previously revised down its inflation expectations for the current fiscal year from an earlier estimate of 4% to 3.7%, and Governor Malhotra indicated that inflation is likely to fall below the target.

However, given the magnitude of the interest rate cut, the RBI stated that there is limited room for monetary policy to support growth and will adjust its monetary policy stance from "accommodative" to "neutral."

The RBI governor said, "From now on, (the Monetary Policy Committee) will carefully assess upcoming data and evolving prospects to chart the future course of monetary policy, aiming to achieve an appropriate balance between economic growth and inflation."

Regarding India's economic outlook, Malhotra pointed out, "The Indian economy presents a picture of strength, stability, and opportunities."

However, the central bank maintained its full-year GDP growth forecast for the current fiscal year at 6.5%, a significant slowdown compared to the 9.2% growth rate in the previous fiscal year. The RBI also highlighted growth concerns at its previous meeting due to tariff threats from the US.