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The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has cumulatively slashed the key policy rate—the repo rate—by 100 basis points in 2025.

Theoretical Basis: Monetarism and Growth

The RBI’s approach reflects the influence of monetarist economic theory, which holds that a well-regulated money supply can stabilize prices and support economic growth. Under this framework, increasing money supply tends to lower interest rates, stimulating investment, production, employment, and in turn, aggregate demand.

In the current scenario, the RBI appears to be prioritizing growth concerns over inflation risks, indicating a strategic pivot toward reviving a slack domestic economy amid uncertain global conditions.

CRR cut adds to liquidity

Alongside the repo rate cuts, the RBI has also reduced the Cash Reserve Ratio (CRR) by 100 basis points, bringing it down to 3%. CRR is the proportion of total deposits that commercial banks must hold as reserves, either with the RBI or internally, without using it for lending. By lowering the CRR, banks are now able to lend a higher portion of their deposits, potentially injecting an additional ₹2.5 lakh crore into the economy by the end of 2025.

The combined impact of repo rate and CRR reductions is expected to increase liquidity, lower lending rates, and stimulate investment and job creation. The RBI has projected GDP growth at 6.5% and inflation around 3.7% for the current fiscal year.

Non-Banking Financial Companies (NBFCs) are likely to benefit significantly from the RBI’s policy shift

Assessing the real impact: Uncertainties remain

Despite the bold measures, several challenges could dilute the intended outcomes of the monetary policy:

Delayed transmission and limited reach

Monetary policy transmission is not immediate. Typically, it takes two to three quarters for the effects to be visible. Furthermore, interest rates on loans are linked to different benchmarks. While loans under the External Benchmark Lending Rate (EBLR)—like home, auto, and MSME loans—are directly affected by repo rate changes, many corporate and personal loans fall under the Marginal Cost of Funds-Based Lending Rate (MCLR). MCLR is set by individual banks based on their own cost structures and may not respond significantly to repo rate cuts.

Weak credit demand

Monetary easing can only boost the economy if there is a corresponding increase in credit demand. But this demand is contingent on broader economic confidence and

income growth. Real wage growth remains stagnant or even negative in some sectors. While rural consumption has shown some improvement, urban consumption remains subdued. Reports suggest declining demand for small cars, budget housing, and consumer durables, all pointing toward weak consumer sentiment.

Global economic uncertainty

The international environment remains volatile. Geopolitical tensions and disruptions in global supply chains, along with protectionist measures such as the US tariff hikes, are weighing on global trade and investment decisions. Many businesses are postponing investment plans, further impacting export and capital formation.

Capital flow risks and currency volatility

As pointed out by Sachchidanand Shukla, Group Chief Economist at L&T, the US Federal Reserve has yet to begin its own rate-cutting cycle. If the US eventually cuts rates while India already has, it may widen the interest rate differential, affecting capital inflows and adding pressure on the Indian rupee. This could lead to exchange rate volatility and complicate the international trade environment for India.

Conclusion: A bold yet uncertain gamble

While the RBI’s aggressive monetary easing in 2025 reflects a clear intent to stimulate growth and ease financial stress, its effectiveness depends on multiple external and internal factors—from credit appetite to global trade conditions.

The coming quarters will reveal whether this strategy can truly revive investment, consumption, and employment, or whether structural challenges and global uncertainties will continue to hold the economy back.