In an action -rich policy, the Monetary Policy Committee (MPC) unexpectedly surprised many. These included cuts in a large-to-to-time immediate repo rate by 50 basis points (BPS) and 100 BPS respectively and a decrease in a phased cash reserve ratio (CRR). In addition, the trend was moved back to the neutral from adjusted, which, after three consecutive BPS deductions, were suggested to the possible end of the cycle of ease, after three consecutive BPS deficiency. These measures were facilitated to inspire some certainty, otherwise the desire to inspire some certainty around monetary policy actions on the dynamics of development-explosion, otherwise in the turbulent global economic environment.
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While expectations were centered around the rate of 25 BPS rate in this policy meeting, MPC surprised the markets with a 50 BPS repo rate cut. MPC selected the rate action for the rate action to squeeze the legs in transmission. Currently, with sufficient liquidity in the banking system, and with a decrease in the upcoming CRR, with the offering of more spontaneity, the rate cut should quickly cut and lend. A amendment of interest rates on small savings schemes for Q2FY26, which will be reviewed by the government at the end of this month, will definitely assist in this process.
The front loading of the rate reduction was enabled by the consumer Price Index (CPI) of the MPC-amended by the downwards in the inflation estimates, below the middle-point of its medium-term target. The committee first increased its annual average CPI inflation from 4.0% to 3.7% for FY26. This was mainly led by 70 bps and 50 bps respectively in the estimates of Q1 and Q2 of FY2 26 and Q2. We take another dip in CPI inflation from 3.2% in April 2025 in May 2025 and up to sub -3% in June 2025. Overall, inflation is expected to exceed 4% in Q1fy26 with more than 3% in Q1. In addition, prints for H1Fy27 are unlikely to be gentle as given adverse base effects for this period.
In addition, an unexpected 100 bps CRR cut has been scheduled to be in four installments between September 2025 and November 2025. 2.5 trillion during the busy season. A second surprise here is a clear forward guidance around the provision of liquidity on an upfront basis instead of waiting until the next policy meeting in August. This advance declaration policy is likely to be inspired by the strong priority of the central bank for certainty.
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The front loading of the rate cuts along with changes in policy stance seems to be a fairly strong sign of the current easy cycle, given the clear message in the April 2025 meeting to provide further guidance at the stance policy rates. This suggests that we are looking at a stagnation in the next meeting in August 2025, until the number of inflation is physically different that the MPC has determined.
Our own estimates suggest that CPI inflation will an average of 3.5% in FY26, 20 BPS less compared to the forecast of MPC, with some less print expectations in Q3 and Q4Fy26. In addition, our GDP growth estimate for FY26 is at 6.2%, 30 bps less than MPC, which was kept unchanged from the April 2025 meeting.
Before announcing today’s 50 BPS cut, we expected to make the additional 75 BPS easier before the end of this cycle. The content of a final 25 BPS cut will be paired with the forecast of inflation or development of the MPC, or the bottom modification in both. As a result, this is likely to be pushed in the October 2025 meeting, when Q1Fy26 GDP print will be available, and the monsoon outprise will be behind us, and the impact on the livelihood of food inflation beyond FY26 will be somewhat clear.
While Bond markets initially reacted to policy decisions, the change in stance later increased the yield. We believe that a cumulative reduction of 50 BPS was largely priced, and the only surprise was front loading. Further, we hope that the remaining part of the calendar year will trade between 6.20% and 6.40%, until the expectations are crystallized around another rate cut. In that case, the yield of 10 years can be reduced by 6.0%.
Aditi Nair is the main economist and chief, research and outreach, ICRA.