Agricultural Gains Anchor Inflation Fall; RBI Cuts Rates Sharply to Spur Growth  

In a move aimed at stimulating economic growth amidst a favourable inflation outlook, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) today announced a substantial 50 basis point (bps) reduction in the policy repo rate, bringing it down to 5.50 percent with immediate effect. After six consecutive months of declining headline CPI inflation, the decision underscores the RBI's confidence in achieving its medium-term inflation target while actively supporting domestic economic activity, particularly in the agricultural sector. 

The MPC, chaired by RBI Governor Sanjay Malhotra, noted the sustained moderation in consumer price index (CPI) inflation, which hit a nearly six-year low of 3.2 percent year-on-year in April 2025. This significant dip was largely attributed to a consistent decline in food inflation, marking its sixth consecutive monthly fall. 

"Inflation has softened significantly over the last six months from above the tolerance band in October 2024 to well below the target with signs of a broad-based moderation," Governor Malhotra stated in his address, emphasizing the MPC's conviction that headline inflation is not only durably aligning with the 4 percent target but is likely to undershoot it marginally during the year. 

Agriculture Sector: A Pillar of Strength 

A key factor underpinning the optimistic inflation outlook and the MPC's decision to ease monetary policy is the robust performance and promising future of the agricultural sector. The provisional estimates for 2024-25 placed India's real GDP growth at 6.5 percent, with agriculture playing a crucial role. 

The MPC highlighted the "record wheat production and higher production of key pulses in the Rabi crop season," which are expected to ensure an adequate supply of essential food items. Looking ahead, the forecast of an "above normal south-west monsoon along with its early onset augurs well for Kharif crop prospects." This positive outlook for the agricultural sector is a significant driver behind the moderating inflation expectations, especially for rural households. 

Governor Malhotra further elaborated on the strength of the agricultural sector, noting "a very good harvest in both the kharif as well as rabi cropping seasons, [making] the supply of major food crops comfortable." He also pointed to healthy reservoir levels and the highest wheat procurement in the last four years, all contributing to a comforting stock position. 

Growth Imperative Amidst Global Headwinds

Despite the encouraging inflation trajectory, the MPC acknowledged that growth remains "lower than our aspirations amidst a challenging global environment and heightened uncertainty." The global economic outlook, while showing some signs of easing trade tensions, continues to be elevated, leading to downward revisions in global growth and trade projections by multilateral agencies. 

To counteract these headwinds and stimulate domestic demand, the MPC emphasised the imperative to "continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum." The decision to frontload the rate cut by a substantial 50 bps is a clear signal of the RBI's commitment to supporting economic expansion. 

While the agricultural sector is expected to provide a strong foundation for rural demand, sustained expansion in the services sector is anticipated to bolster urban demand. Investment activity is also projected to improve, driven by higher capacity utilization, healthier balance sheets of financial and non-financial corporates, and the government's continued push on capital expenditure. 

Monetary Policy Stance Shift to Neutral 

With the policy repo rate having been reduced by a total of 100 bps since February 2025, the MPC also announced a shift in its monetary policy stance from 'accommodative' to 'neutral'. This indicates that while the RBI has provided significant support to growth, its future policy actions will be more data-dependent, carefully assessing incoming information to strike the right growth-inflation balance. 

The RBI will continue to monitor global economic developments, particularly "weather-related uncertainties and still evolving tariff-related concerns with their attendant impact on global commodity prices," which remain potential risks to the otherwise benign inflation outlook. 

Overall, today's monetary policy announcement signals a confident RBI, leveraging the gains made on the inflation front, largely aided by a robust agricultural performance, to provide a substantial impetus to economic growth, aiming to propel India towards a higher aspirational trajectory.