After Major Rate Cut, RBI Urges Banks to Lower Lending Rates as Economic Conditions Improve
After Major Rate Cut, RBI Urges Banks to Lower Lending Rates as Economic Conditions Improve
Following a significant 50-basis-point rate cut on June 6, the Reserve Bank of India (RBI) has called on banks to ease lending rates, citing favorable financial conditions that support stronger policy transmission. In its June State of the Economy report, the RBI emphasized that the current macroeconomic environment offers banks ample scope to pass on the benefits to borrowers.
The report highlighted strong momentum in the domestic economy, with high-frequency data from May 2025 showing solid performance in both industrial and services sectors. The agricultural sector also showed broad gains across major crops for the 2024–25 season. Inflation has remained below the central bank’s target for four consecutive months, further strengthening the case for lower borrowing costs.
While the domestic outlook is upbeat, the RBI flagged several global risks. It warned of persistent uncertainty in global trade, geopolitical tensions—especially following the Iran-Israel conflict—and rising protectionism, which major institutions like the OECD and World Bank believe could slow global growth.
Indian equity markets saw modest gains through May and June, despite a temporary dip prior to a sharp rebound on June 20, triggered by global geopolitical developments.
The RBI also cautioned about near-term risks, including potential inflationary pressures, rising term premia due to fiscal strains in the U.S., and increasing spreads in emerging markets amid global risk aversion.
Nonetheless, the central bank struck an overall optimistic tone. Consumer sentiment remains stable, with improved expectations for the future. State governments are reportedly keeping a tight rein on fiscal spending while planning to boost capital expenditure to 3% of GDP in the next fiscal year—indicating a shift toward long-term, productive investments.
Another positive signal is the India Meteorological Department’s prediction of an above-normal monsoon (106% of the long-period average), which could stimulate rural demand and enhance agricultural productivity.
India continues to outpace other major economies, driven by strong capital formation, a manufacturing revival, and robust growth in services supported by record hiring levels. However, the RBI acknowledged emerging concerns, including slower credit growth, weakening urban demand, rising unemployment, and fiscal stress at the state level.
