RBI lowers its inflation estimate for 2025-26 to 3.7%

RBI in its monetary policy announcement today, 6^th June, 2025 lowered its  consumer price inflation estimate for 2025-2026 to 3.7% from 4%. The lower estimate gave room to the central bank to cut interest rate by 50 basis points or 0.5%. The larger expectation was that the central bank would go for a 25-basis point rate cut.

Equity markets jumped after the rate cut announcement and lower inflation estimate. At 12:24 p.m. Indian standard time, 6^th June, 2025, Nifty 50 is up by 231.15 points or 0.93%. Sensex is up by 699.58 points or 0.86%. Indian equity markets were in red today before the monetary policy announcement came.

The relationship between interest rate and inflation

Central banks tend to increase interest rates when inflation rate is rising. Higher interest rates increase the cost of interest sensitive consumption and investment. This in turn lowers demand in the economy. Lower demand checks rising inflation.

While lowering its inflation estimate, RBI governor Sanjay Malhotra said that RBI will maintain its neutral policy stance. This means that RBI will not increase money supply in the economy for the time being, as this carries the risk of increasing inflation rate.

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Source: RBI