By Fabiana Negrin Ochoa and Jihye Lee

India's central bank surprised markets with a jumbo rate cut, seizing on cooling inflation to frontload monetary easing and bolster economic growth amid heightened global uncertainty.

The Reserve Bank of India's monetary policy committee voted Friday to lower the benchmark repo rate to 5.50% from 6.00%, delivering a deeper cut than the 25-basis-point move economists had forecast in a Wall Street Journal survey.

The 50-basis-point cut is the central bank's largest since March 2020, at the height of the pandemic.

India's growth-inflation dynamics call for frontloading rate cuts to support growth, RBI Gov. Sanjay Malhotra said, citing a marked pullback in inflation over the past six months.

The central bank lowered its inflation forecast for the year to 3.7% from 4.0%.

"Growth, on the other hand, remains lower than our aspirations amidst [a] challenging global environment and heightened uncertainty," he said at a press conference.

The RBI kept its growth forecast for the year unchanged at 6.5%.

The central bank also reduced the cash reserve ratio, injecting additional liquidity into the banking system to support lending and consumption.

The move rippled across markets, with the yield on 10-year Indian government bonds initially falling by around 8 basis points before stabilizing to last trade 3 basis points higher at 6.23%. Equities gained, with both the blue-chip Nifty 50 and broader Sensex indexes rising. The rupee was little moved.

Malhotra, a Princeton-educated career bureaucrat who became RBI governor in December, emphasized the importance of stimulating private consumption and investment to support growth.

But after delivering 100 basis points of cuts since February, he said the committee now feels that monetary policy has "very limited space to support growth."

Accordingly, the RBI shifted its policy stance to neutral from accommodative, just two months after adopting an accommodative stance--an abrupt reversal that surprised many observers.

For ING's Deepali Bhargava, the pivot seemed a bit counterintuitive, given that inflation has been running below target and real policy rates remain well above historical norms.

"The RBI is signalling a pause, but it's leaving the door open for more easing if growth or inflation weakens further," she said.

Some analysts believe Friday's cut may mark the end of the current easing cycle, which began in February. Others are more dovish.

Economists at OCBC expect the repo rate to fall to 5.00% by the end of the year. Nomura analysts forecast more easing ahead too.

"The policy outlook will depend on the macro outlook," analysts led by Sonal Varma wrote in a note, pencilling in a pause in August, followed by 25-basis-point cuts each in October and December.

The RBI said it will continue to assess incoming data and developments as it charts the course of future policy.

Much hinges on the impact of President Trump's tariffs on trading partners, which have been put in legal limbo by a U.S. trade court ruling. A deadline for countries to reach bilateral deals with the U.S. is also fast approaching.

Faced with a 26% tariff on its goods, India has been in talks with the U.S. Analysts see a good chance of a trade deal, which could win India some reprieve from country-specific as well as sectoral tariffs.

Trump's steel and aluminum tariff hikes affect billions of dollars in Indian exports. In mid-May, India told the World Trade Organization that it may consider retaliatory tariffs on U.S. goods to counter the steel and aluminum duties, without specifying further.

RBI's Malhotra acknowledged these headwinds Friday.

While tariff uncertainty continues to weigh on India's export prospects, the free-trade agreement reached with the U.K. and the "fast progress being made in negotiations with other countries should provide a fillip to trade," he said.

Spillovers from prolonged geopolitical tensions, and global trade and weather uncertainties, pose downside risks to growth, the RBI governor said.

Write to Fabiana Negrin Ochoa fabiana.negrinochoa@wsj.com and Jihye Lee at jihye.lee@wsj.com

(END) Dow Jones Newswires

June 06, 2025 06:33 ET (10:33 GMT)

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