Having commenced the easing cycle by cutting the benchmark repo rate by 25 basis points (bps) in its latest monetary policy committee (MPC) meeting, the Reserve Bank of India (RBI) will likely cut repo rate by 75-100 bps more by FY26 end, economists say.
“We continue to expect a terminal rate of 5.50 per cent by end-2025, or 75 bps of additional easing, with the next cut in April. Our view of a deeper cutting cycle (100bp including current cut)…is premised on our view that India’s growth is still cycling down and will surprise to the downside…,” economists at Nomura said.
RBI appears concerned on growth front, as reflected in acknowledgement of weak urban consumption
Reading between the lines, the foreign brokerage believes that the regulator is concerned about growth, which is reflected in the frank acknowledgement of weak urban consumption and the mention of how a growth recovery from the recent trough still keeps the trajectory lower than FY24 growth levels of 8.2 per cent.
The commentary around rupee depreciation already being accounted for in the RBI’s inflation forecasts, and the downplaying of any increase in core inflation also indicates that MPC sees more space to ease rates further.
Elevated rates have impacted India’s GDP growth this fiscal
According to CRISIL Ratings Chief Economist Dharmakirti Joshi, the recent easing in consumer price index (CPI) inflation, and the need to remain supportive of economic growth has moved the Mint Road. With the Trump Administration in the US shaking up global markets, he expects the RBI to be proactive in using liquidity and forex management tools. A tariff war set off will have bearing on policy rate cuts worldwide, he said.
“Elevated rates have impacted India’s GDP growth this fiscal. The Budget for next fiscal is mildly supportive for growth, while continuing on the fiscal consolidation path. We expect the MPC to cut another 75-100 bps off the policy rate next fiscal. Risks from weather and US tariff policy will have a bearing on this,” he said.
According to UBS’ sensitivity analysis, if India rupee (INR) depreciates by 5 per cent against US dollar, inflation could be higher by around 25-30 bps, while GDP growth could get a boost of 25 bps through the short-term stimulation of exports.
UBS expects RBI to cut rates by a cumulative 75 bps in this cycle
“However, the pass-through is non-linear and asymmetric. Incorporating our expectation that headline CPI inflation should soften towards 4.5%YoY by March 2025 and further towards 4.2% in FY26, we maintain our base case that RBI will cut rates by a cumulative 75bps in this cycle,” the brokerage said. ENDS
