RBI slashes interest rates, but who will borrow?

RBI aggressively eases monetary policy to boost consumption and investment, focusing on SMEs and rural sectors for growth.

The Reserve Bank of India is rolling out aggressive monetary easing to revive consumption and investment in the economy, but the payoff hinges on whether banks ramp up credit and companies want to take on more debt in uncertain economic conditions.

The Reserve Bank of India on June 6, 2025 cut its key repo rate by a larger-than-expected 50 basis points and slashed banks' cash reserve ratio (CRR) by 100 bps, taking advantage of cooling inflation as U.S. President Donald Trump's tariff threats add to global uncertainty.

The RBI's pivot comes at a crucial moment. A strong monsoon is expected to lift rural incomes and sentiment, but urban consumption and private investment remain tepid.

The policy shift is in line with the government's broader push to support micro, small and medium enterprises (MSMEs), critical to create jobs in the world's most populous country.

The MSME sector contributes 29% to India's GDP, 40% of exports and employs over 60% of the country's workforce. In contrast, just 16% of overall bank credit goes towards this sector as of April, RBI data showed.

By unlocking bank funds, the central bank is betting that cheaper credit will revive urban demand, stimulate SME investment, and complement the rural boost — helping broaden the economic recovery.

"Boosting consumption alone will not lead to long-term structural growth, the idea is to also boost investments by small and medium sized (SME) firms where there is a large appetite," said a source familiar with the central bank's thinking.