As the Monetary Policy Committee of the Reserve Bank of India (RBI) sits down to deliberate on interest rates for three days, beginning Wednesday, it will have its eyes firmly on external factors, which is the biggest risk currently at sight for growth in India. Keeping in view the fact that inflation is under control, most analysts believe the rate-setting panel might cut the repo rate by another 25 bps.
With consumer price index (CPI) based inflation forecast to trail 4% for a large part of this fiscal, monetary easing by the MPC is likely to continue. A 25 bps rate cut is expected this week, followed by two more cuts over the subsequent two policy reviews, taking the repo rate to 5.25% by the end of the cycle. With growth below trend and inflation below target, we believe policy rates will need to move into the accommodative zone rather than neutral, says a report by Nomura.
“As such, we expect an additional 100 bps rate cut to a terminal rate of 5.00%, with 25 bps cuts in each of June, August, October and December,” it says. Nomura underscored the fact its projection for both GDP growth and inflation are lower than the RBI estimates. Nomura predicts India’s GDP to grow at 6.2% against RBI’s projection of 6.5%, and FY26 inflation to be 3.3% against 4% predicted by the RBI.
“RBI would be one of few central banks which are in a comfortable position to ease policy rate with the dual mandate of inflation at 4% and supporting growth not in conflict,” says Gaura Sen Gupta, chief economist, IDFC first Bank. IDFC First Bank expects another 25 bps cut in the forthcoming MPC meet. Gaura Sen Gupta expects the overall tone of the policy to be positive on growth both consumption and investment. “Based on our FY26 CPI estimate of 3.5%, we see terminal repo rate at 5.25%,” says Sen Gupta.
According to Aditi Nayar, chief economist and head of research & outreach at ICRA, with CPI inflation forecast to trail 4% for a large part of this fiscal, monetary easing by the MPC is likely to continue. “A 25 bps rate cut is expected this week, followed by two more cuts over the subsequent two policy reviews, taking the repo rate to 5.25% by the end of the cycle,” she says. However, SBI has been hoping for a 50 bps cut. Domestic liquidity and financial stability concerns have receded, inflation is expected to stay within the tolerance band, and therefore, keeping the domestic growth momentum intact should be the main policy focus and provides the justification of a jumbo rate cut, it argues.