MUMBAI: Even though the final punitive tariffs announced by the US for India average 27%, which is much higher than anticipated, this will have some impact on the growth outlook. However, Mint Road observers are unanimous in predicting a 25-basis point rate cut next week, as the impact of the trade war on prices will be negligible, ensuring that inflation will continue to trend down.
After almost five years, the Reserve Bank-led monetary policy committee under the new governor Sanjay Malhotra had effected a 25 bps repo rate cut in its February review, bringing down the key policy rate to 6.25%. And since then the inflation print has been comforting and recorded a seven-month low of 3.6% in February and the same is projected to print in under 4% in March.
“Our early assessment of the impact of the tariffs is negative for some sectors such as steel, non-ferrous metals, auto components and cut and polished diamonds and this poses a mild downside risk to our growth forecast. But for now, we are maintaining our baseline GDP growth forecast of 6.5% for FY26.
“As a result, we continue to expect the MPC to reduce the repo rate by 25 bps next week, based on the expectation of a moderation in the CPI inflation to 4.2% on average in FY26. A final rate cut of 25 bps may be forthcoming in the June or August policy review, based on the evolving growth inflation dynamics,” Aditi Nayar, the chief economist at Icra Ratings told TNIE on Thursday.
Tanvee Gupta Jain, the chief economist at UBS India said without offering a timeline, “we maintain our view that there is scope for a further 50 bps cut in the repo rate in this cycle. Besides ensuring currency flexibility, we expect continued monetary policy support in terms of rate cuts (scope of more policy easing than our base case), liquidity support and regulatory easing.”
Similarly, DK Pant, the chief economist at India Ratings too expects another rate cut 25 bps next week.
“With the inflation intensity declining and expectation of inflation trending towards 4%, we expect a 25 bps rate cut in April monetary policy,” Pant told TNIE.
According to Radhika Rao, the executive director & a senior economist at DBS Bank, the RBI will shift its focus from inflation fighting to supporting growth from now on, as the punitive tariffs will slow global growth for one and the lingering geopolitical tension will continue to pose challenges to domestic growth momentum. Moreover, inflation is unlikely to overshoot the target this fiscal.
“Given these, we expect the MPC is likely to continue with the rate-cutting cycle that began in February, and will deliver another 25-bps reduction in the repo rate during the April meeting, while maintaining the neutral stance amidst global headwinds,” Rao said.
Echoing similar views, Rajni Sinha of Care Rating also said lower inflation has paved the way for another 25 bps rate cut next week.
Rahul Bajoria, head of economic research at BofA Global Research, said, “with sub-4% CPI inflation and sub-7% GDP growth, the hurdle for MPC to cut rates again in April policy meeting is very low. So we expect another 25 bps cut in the repo rate to 6%, and continue to expect 5.50% as terminal rate by October.”
He further said the path for further policy easing appears quite clear and straightforward, with growth likely to be seen in a range that’ is deemed non-inflationary, headline inflation likely to be sub 4% for next few months, and the pressure on exchange rate coming down substantially. This ongoing cohesion in economic data should help the Reserve Bank and its monetary policy committee to reduce policy rates again in the April meeting, taking the repo rate to 6%, by cutting it by 25 bps.”