MUMBAI: Most analysts have ruled out further repo rate cuts in 2025 given the hawkish inflation stance that the central bank has taken in the current review wherein it has unanimously voted to leave all the key rates unchanged at 5.5%.
Soumyakanti Ghosh, the chief economic advisor to the State Bank, in a note Wednesday said even though the MPC has pared its CPI inflation forecast for FY26 by a significant 60 bps to 3.1%, it sees inflation shooting up again and crossing the 4-percent mark in the March quarter and further rising in Q1 of the next fiscal.
"That the MPC unanimously decided to maintain the repo rate at 5.5% reflects a cautious stance amid ongoing global uncertainties, including the impact of trade tensions and tariff wars. With most rate cuts already frontloaded, the Reserve Bank has chosen to pause and assess incoming data before making further moves. The committee also reaffirmed its neutral policy stance, signaling a balanced approach to managing inflation and supporting growth," Ghosh said.
Describing the current pause as a "technical one", not ruling out the possibility of a future rate cut, he said it underlines that the bar for such a move in 2025 has now risen significantly.
The inflation relief is temporary as it is expected to rise sharply to 4.9% in Q1 FY27. This trajectory keeps inflation in the “uncertain band,” making the RBI wary of acting too soon and risking a reversal later, he said, adding with a large portion of rate easing has already been front-loaded, and leaves limited room for further accommodation, unless there’s a major shift in inflation or growth trends, the central bank has little incentive to act quickly.
In a note, Aditi Nayar, the chief economist at Icra Ratings, said the status quo policy was a surprise to her as she was expecting a 25 bps cut.
"The strong emphasis on the CPI inflation estimates of over 4% from Q4FY26 onwards limits the space for rate cuts in the upcoming policy meetings, thereby signalling the beginning of an extended pause. We currently expect the policy rates to remain unchanged in the October policy review, unless there are large surprises on the growth front, which lead to a material cut in growth projections,” Nayar said.
Rajani Sinha, the chief economist at Care Ratings, also feels the same, saying though inflation has fallen sharply in the last few months, she sees CPI rising above 4% in Q4FY26 and averaging above 4.5% in FY27, given the low base of this year. "This implies that next year we are looking at real rate of interest in the range of 1-1.5% and it can even go lower. This limits the scope of any further rate cut in this cycle," she said.
According to Dipti Deshpande, principal economist at Crisil Ratings, the MPC is keeping a hawk’s eye since transmission of the rate cuts to the credit markets remains a work in progress. While CPI has eased more than expected, an upturn looms in the second half for three reasons: the upcoming festive season; easier monetary policy propping up demand; and an expected statistical uptick from the low base of last fiscal.
Given all this, she said, “We expect one more repo rate cut this fiscal. A benign inflation outlook and risks from US tariff hikes to economic growth will be the key determinants.”
Tanvee Gupta Jain, the chief economist at UBS Securities India, expects inflation to remain benign at 3% in FY26, a tad below the RBI estimate of 3.1%, supported by good agricultural output, favourable monsoons and lower global crude prices.
On the easing side, she expects the looming tariff uncertainty to open up space for more easing, which may come as early as in the October policy with a 25 bps reduction.
“We see space for the terminal repo rate to fall towards the 5-5.25% range and for now we are adding a 25 bps rate cut in the October meeting to our baseline, with risk of another if growth surprises lower driven by US trade tariffs, or/and a step shift lower in global growth,” Gupta-Jain said.