It's a big week for interest rates with the RBI trailblazing a rate cut bonanza on Friday.
The benchmark repo rate is reduced by a larger-than-expected 50 bps with immediate effect, while the cash reserve ratio (CRR) will be reduced by 100 bps in four equal tranches by November.
This is the third consecutive rate cut and the benchmark repo rate now stands at a 6-year-low of 5.5%.
With 100 bps rate cuts coming in quick succession, the RBI also decided to change the policy stance from accommodative to neutral. In other words, the rate cut kindness party has well and truly begun and as RBI officially opens its happy hour window keeping the path for rates downwards, analysts expect the repo rate to settle at 5%-5.25% or even lower this fiscal.
It also means, borrowers can pack themselves a picnic basket as interest rates on fresh home loans are set to fall lower than 7.5% over the coming weeks. India Inc too can spread a thick layer of jam and kickstart the much-awaited capex cycle.
It's true that money is important to revive credit growth, but perhaps Governor Sanjay Malhotra believes that a lot of money is important. So he crushed the CRR, or the money banks need to set aside as liquid cash, to 3% from 4%, releasing primary liquidity of as much as Rs 2.5 lakh crore. This is expected to do multiple things at once. It'll reduce the cost of funding, improve monetary policy transmission, provide cheap credit to industry and above all stimulate consumption and investment.
In short, RBI has finally emerged victorious seizing the inflation monster by the throat and has now turned its single-minded focus towards growth, though Malhotra reasoned that he wasn't favouring one over the other.
Few expected RBI to brake this harder on policy rate cuts.
While SBI Research was an outlier giving out a rare prediction of 50 bps reduction to revive the credit cycle and stimulate growth, others argued that a super sized rate cut may be seen as a underlying symbol of tough times and set off inflationary expectations, which are harder to manage than inflation itself.
But Malhotra stressed that inflation expectations have moderated and will continue to moderate. And putting a cherry on the picnic cake, he revised FY26 inflation forecasts downwards to 3.7% from 4% projected in April. Q1 estimates are pegged at 2.9% lower than 3.6% estimated earlier, followed by Q2 at 3.4% (3.9% earlier), Q3 at 3.9% (from 3.8%) and Q4 at 4.4%.
While the inflation monster has retreated back to the barn, RBI is well aware that the devil can be a liar. Moreover, as Malhotra noted, globally the last mile of disinflation is getting a little more protracted and so central banks remain extremely cautious. Back home though, we are witnessing broad-based moderation in price rise and the above normal-monsoon is expected to rein in food price pressures in the coming quarters.
As for growth, although consensus estimates project India's FY26 real GDP at about 6.2%, RBI retained its previous forecast of 6.5%. But given the potential downside risks from geopolitical tensions and trade policy uncertainties, it revised the quarterly growth projections with Q1 set at 6.5%, Q2 at 6.7%, Q3 at 6.6% and Q4 at 6.3%.
Meanwhile, transmission remains uneven with big banks like SBI yet to pass on the February and April rate cuts to borrowers. Analysts expect the rate transmission to gain momentum and with Friday's cut, home loan rates are expected to fall below 7.5%. External economic pressures like trade policies and others would require continued RBI's accommodative stance and policy support for the Indian industry to sustain the growth. Besides, subdued manufacturing growth, uneven consumption demand, a delayed recovery in private capital expenditure and weak exports need attention.
