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    Home » Here’s how it will affect India’s middle class
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    Here’s how it will affect India’s middle class

    userBy userJune 7, 2025No Comments6 Mins Read
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    The Reserve Bank of India (RBI) surprised everyone on Friday by announcing a sharper-than-expected cut in interest rates. This decision had an immediate impact on the financial markets, including the exchange rate of the Indian Rupee (INR), but is also likely to have major repercussions on the daily lives of millions of Indians.

    The RBI embarks on a bolder interest rate policy

    Against the backdrop of an unstable global economy, but marked by a lull in inflation at home, the Reserve Bank of India cut its key interest rate by 50 basis points, from 6% to 5.5%, marking the third consecutive rate cut since February.

    RBI Governor Sanjay Malhotra pointed out that consumer inflation had slowed considerably in recent months, falling from 5.2% in December to 3.2% in April, well below the central bank’s mid-target of 4%.

    “It has become even more important to focus on domestic growth amidst sustained price stability”, Malhotra was quoted as saying by Outlook Business.

    The repo rate, which determines the cost of credit for Indians, is now at its lowest level since August 2022.

    In addition, the RBI’s Monetary Policy Committee (MPC) has unveiled an exceptional measure, the reduction of the Cash Reserve Ratio (CRR) by 100 basis points, from 4% to 3% by the end of November. This decision should add the equivalent of 2.5 trillion Indian Rupees of liquidity to the banking system.

    According to Malhotra, this measure is intended to support bank lending to the productive sectors.

    Can RBI interest rates fall further?

    Despite the large stimulus, the central bank has tempered enthusiasm by changing its monetary policy stance: it is abandoning the “accommodative” stance adopted at the beginning of 2024 and returning to a “neutral” stance.

    This change means that further interest-rate cuts are not on the agenda, unless there is a major turnaround in macroeconomic indicators.

    “From here onwards, the [Monetary Policy Committee] will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance,” the RBI governor said, according to CNBC.

    Analysts, surprised by this double rate cut, are generally of the opinion that the central bank should not cut rates any further in the short term, barring an external shock.

    “This big rate cut is, as the RBI Governor remarked, a front-loading of the rate cut. The change in monetary stance from accommodative to neutral also indicates that more rate cuts are unlikely unless the situation warrants“, said VK Vijayakumar, chief investment strategist at Geojit Investments Ltd, according to Outlook Business.

    Michael Wan, Senior Currency Analyst at MUFG, also shares a similar view:

    “The most important takeaway from the RBI meeting is that this is a front-loading of rate cuts, rather than a reassessment of a lower terminal rate, with lower inflation giving RBI policy space to bring forward the cuts,” he shared in a research report.

    However, the bank is maintaining its projection of a further RBI rate cut in December:

    “We keep our forecast for RBI to deliver another rate cut in 4Q2025 (calendar year), bringing the repo rate to 5.25% by December 2025, and we are implicitly forecasting a shift in timing rather than a more dovish rate profile. The next leg of the rate move will likely have to come from a downside inflation surprise, and this is effectively what we are forecasting with our expectation for inflation to average 3.4% in FY2025/26 (vs RBI’s forecast of 3.7%),” adds Wan.

    Financial markets welcome the RBI’s announcement

    The stock markets reacted immediately, with the Nifty50 index breaking through the symbolic 25,000-point barrier. In particular, the Nifty Bank, the index of banking stocks, set the tone with a spectacular gain of more than 800 points, buoyed by the prospect of a rise in credit volumes.

    On the bond market, yields on 10-year government bonds fell, reflecting the easing of inflationary expectations and renewed confidence in the growth trajectory.

    The Indian Rupee, on the other hand, came under slight downward pressure against the US Dollar (USD). While the fall in interest rates has made local credit cheaper, it has also made Rupee-denominated assets less attractive to foreign investors looking for yield.

    The INR currency temporarily fell before stabilising. Some analysts believe that the pressure on the Indian Rupee could continue, especially if US interest rates remain high for much longer.

    The impact on households: more credit, but lower yields

    Beyond markets, it is Indian households, particularly the middle classes, who will feel the tangible effects of this monetary shift in their daily lives. 

    With the cumulative fall of 100 basis points in the repo rate since February, variable-rate loans linked to the repo, which have become the norm for home loans since 2019, have seen their rates fall significantly.

    At major banks, new home loans are now being offered at rates below 8%, the Indian Express notes. And this new central bank rate cut will further lower mortgage costs. These lower monthly repayments could encourage many households to bring forward their property or car projects, thereby supporting sustainable consumption, a crucial driver of growth for the Indian economy.

    But this low interest rate policy is not without its drawbacks. Term deposits (FDs), highly prized by households for their security and guaranteed return, are likely to become much less attractive.

    For retirees and cautious savers, this represents a real erosion of returns and purchasing power, especially if interest rates fall below inflation.

    Swapnil Aggarwal, director of VSRK Capital, said, “The reduction in interest rate will impact returns on fixed deposits, which were attractive during the high-rate period. With a decline in FD rates, we expect an increased shift in investors to mutual funds, debt instruments, and other market-linked products,” according to Mint.

    Mint also mentioned Vishal Goenka, co-founder of IndiaBonds.com, who said, “A balanced policy encourages growth. Fixed deposit rates to come down sharply as banks transmit this rate cut. Investors should look at 2-3-year corporate bonds for their portfolio, as they continue to offer good spreads over government and FD rates, and interest rates will come down more gradually for corporate bonds.”

    A decision that is reshaping Indians’ daily economic lives

    The surprise fall in interest rates and the massive release of liquidity via the reduction in the CRR mark a turning point that directly affects the lives of millions of Indians.

    For the middle classes and young working people, these decisions mean more accessible credit, lower monthly repayments, and therefore an opportunity to realise long-delayed projects: buying a property, a car, studying, and sustainable consumption.

    At the same time, small savers, particularly pensioners, have to prepare for lower returns on their deposits, which could push them towards riskier forms of investment.

    The central bank has just reorganised the day-to-day economic balances: it favours those who borrow and invest for the long term, to the detriment of those who prefer to save without risk. 

    In a country where access to credit remains a key vector of social mobility, the RBI’s decision could therefore, if well transmitted, strengthen the momentum of domestic growth, provided that price stability is maintained and the banks play their part to the full.



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