RBI’s Rate Cut and Liquidity Push to Spur Private Investment, Support 7% Growth Potential

RBI’s Rate Cut and Liquidity Push to Spur Private Investment, Support 7% Growth Potential

By-DK Srivastava, Chief Policy Advisor, EY India

“India’s GDP growth has performed admirably well in the post-COVID years. It has averaged 7.8% over the period 2022-23 to 2024-25. This is in spite of a challenging global economic environment where global GDP growth has been limited to 3.5%. Over this period, the contribution of net exports to India’s GDP growth has been 0.2% points, (-)2.8% points, and 2.3% points, respectively. Clearly, India’s growth has been largely driven by domestic demand. Within domestic demand, it is mainly the government’s capital expenditure which has been driving India’s growth. A more balanced profile of growth drivers would call for a tangible pickup in private investment demand and external demand. While much can not be said about the way external demand might evolve, domestic private investment demand can be stimulated. In this context, monetary policy is of considerable importance since it affects cost of capital.

The RBI, in its monetary policy review held on 06 June 2025, lowered the policy rate by 50 basis points to 5.5% with the objective of supporting growth. It projected real GDP growth at 6.5% in 2025-26 driven by private consumption and fixed capital formation. The RBI, however, changed its policy stance to neutral from accommodative. The frontloading of policy rate reduction is welcome. However, given the likely global growth slowdown and trade related uncertainties, the RBI may carry forward the momentum of the present interest rate reduction cycle at least until the policy rate reaches 5%. Conditions are ripe for maintaining this downward thrust since CPI inflation remains below the RBI’s target of 4%. In fact, the RBI has revised downwards its CPI inflation forecast for 2025-26 to 3.7% from 4.0% projected in April 2025. As private investment keeps improving, the ongoing rate reduction cycle could incentivize private investment and take India’s potential growth closer to 7% in the next few years.”

By-DK Srivastava, Chief Policy Advisor, EY India

The front loading of the rate cut action plus crr cut indicates focus is on enhancing  the transmission of monetary policy . The neutral stance indicates that the bar for further rate cut is higher but isn’t completely off the table . In the next few policies we expect rbi to remain on pause.

The crr cut which will infuse liquidity in h2fy26 , will ensure system liquidity remains above the 1%of ndtl till March 2026. The need for further omo purchases is much lower now.