MUMBAI: Pegging the terminal policy rate at 5%, unless inflation springs a surprise, most economists forecast one more rate cut, but are split on timing. They described the latest 25 bps reduction in the policy rate as much-needed given the very benign inflation.
HDFC Bank economists Sakshi Gupta and Deepthi Mathew see room for more easing saying, “The substantial downward revision in the inflation forecast suggests that space for further rate cuts remains intact if the recent growth momentum shows signs of faltering ahead."
The February policy therefore remains a live policy in terms of further rate cuts and/or liquidity injections, particularly if the current pace of forex intervention continues in the absence of a trade deal.
On the upwardly revised growth numbers to 7.3%, they retained their earlier forecast of 7.3% considering the stronger H1 numbers and support from a low deflator.
“But we expect growth to moderate during the second half of the year as front-loading effect of exports and government spending wanes, and the impact of higher tariffs on exports becomes more prominent. For FY27, we expect GDP growth at 6.5%,” they said.
On the impact of the rate cut on the rupee, which they see heading further down to 92-93, they said, “The monetary policy is likely to have only a transitory impact on the rupee and the trade deal announcement and capital account flows are likely to be remain the dominant driver for the currency. We see more room for two-way volatility in the rupee-dollar pair in the near-term. However, we believe that the appreciation pressure is likely to be limited as the RBI could absorb any large dollar flows to re-build its forex reserves and manage its forward book and will gain to 87.50-89 by March if there is a trade deal in the absence of which it may fall to 91 by March."
Similarly, Nomura India economists Sonal Varma, Aurodeep Nandi, and Nathan Sribalasundaram also see one more rate cut with the terminal at 5%.
“We maintain our terminal policy rate at 5% and expect a pause in February, but a 25 bps cut in April,” they said, adding the downward revision in inflation to 2% and continuing neutral stance makes the overall policy tone a dovish cut.
“The easing cycle is not over, in our view but, having delivered 125 bps of cuts already, the MPC has the flexibility to go slow from here. We expect a greater focus on policy transmission from here through more liquidity injections measures. In our baseline, we expect an “on hold” policy rate decision in February and the next 25 bps rate cut in April to reach a terminal repo rate of 5%," they said.
Paras Jasrai, an associate director at India Ratings, said the slowing nominal GDP growth would have also played a role in influencing the central bank's decision.
“Going forward, as growth is expected to slow in H2 following a strong H1, the focus will likely shift towards supporting economic expansion, given the benign inflation outlook extending into H1FY27. This scenario provides ample room for growth-supportive measures. However, future policy action will be contingent on incoming data and the anticipated trade deal with the US,” he added.
Madhavi Arora, chief economist at Emkay Global, said tactically smart and flexible forward guidance has also complemented today’s rate easing, “signalling openness to further easing—both on rates and liquidity, in a departure from the June policy.”
However, Kaushik Das, chief economist Deutsche Bank India, Malaysia, and South Asia, expects "a prolonged pause in 2026, unless growth surprises sharply to the downside.”
“Based on the forecast of FY27 growth and real rates, a simple formula indicates a terminal repo rate of 5.25% in this cycle. An important point to consider, though, is the following: given that monetary policy is forward looking and works with significant and varied lags, it makes sense to consider forward-looking projections for growth, inflation and other parameters, and that is why we attach more importance to the terminal repo rate calculation based on FY27 projections of growth and inflation rather than that of FY26. Our forecasts of other economic variables including non-oil-non-gold imports and non-oil exports also indicate a terminal repo rate of 5.25%,” he said.
The growth projections for FY27 indicate a below-trend growth trajectory, which justifies some additional monetary support for the economy, he said, adding, “As the monetary policy is forward looking, the central bank was prudent to put greater emphasis on the future growth trajectory, while informing its decision to cut rates in the December policy, rather than deciding on the basis of the 1H real GDP growth outturn. We think this is a prudent strategy.”
Similarly, Rajani Sinha, chief economist at Careedge Ratings, also does not see a need for more cuts, saying she expects growth to still be healthy at 7.5% in FY26 and around 7% in FY27. "With average inflation at around 4% in FY27, real rate of interest would be in the neutral zone at around 1.25%, implying no need for further rate cuts in FY26,” she said.
Sinha also said the RBI chose to utilise the window of opportunity provided by very low inflation to provide impetus to growth. Moreover, the liquidity injecting measures announced should ensure smooth transition of policy rate cuts done so far.
Bharat Dhawan, the managing partner at the local unit of the French financial consultancy Forvis Mazars India that specialises in tax, audit, and advisory services, said, “By cutting the repo rate by 25 bps, the RBI has signaled a clear tilt towards growth as inflation remains benign. The latest policy announcement delivers a calibrated yet growth-supportive message."
He said, “With inflation falling sharply from nearly 8% to close to 2%, and FY26 growth forecast revised upwards from 6% to 7.3%, the RBI is capitalising on a favourable macroeconomic backdrop to stimulate domestic demand. While maintaining a neutral stance, RBI has clearly prioritised creating conditions that will support growth without compromising vigilance on emerging risks."
He added, “Taken together, today’s policy signals RBI’s confidence in the economic fundamentals and its commitment to ensuring that financial conditions remain conducive to sustained expansion, especially as the economy enters a crucial pre-2026 phase.”
Dharmakirti Joshi, chief economist at Crisil, said the accompanying liquidity-enhancing measures, including open market purchases and forex swaps, underscore the growth-supportive nature of this policy decision.
The repo rate cut is expected to support growth next fiscal, as monetary policy typically has a lagged effect. Today’s liquidity-enhancing measures will also help transmit the policy rate cut to broader market interest rates, Joshi added and pegged FY26 growth at 7%, as there will be a slowdown to 6.1% in the second half due to tariffs and normalisation of government capital expenditure. Next fiscal, he expects GDP to grow at a healthy 6.7%.
