Another rate cut? RBI might soon cut rates by 25 basis points; ICICI flags weak demand, easing inflation
Reserve Bank of India
may have room to cut policy rates amid weak urban consumption and uncertain global demand, according to a report by
ICICI Bank
.
These trends, combined with easing inflation, could prompt the Monetary Policy Committee (MPC) to consider lowering the benchmark interest rate by 25 basis points as early as August.
The report said that with the RBI maintaining a neutral stance and following a data-dependent approach, the recent economic signals offer space for monetary easing.
'Monetary policy is forward looking and next year inflation prints are likely to move higher on the back of a low base, but weak urban and uncertain external demand (tariffs) has opened up room for easing,' the report said, cited by ANI.
'Given that the stance is neutral, which implies a data-dependent approach, a downward revision in inflation opens up room for further easing when growth is showing somewhat a downside bias or at least no reason for any upward revision.
Hence, we believe this opens up policy space for an additional 25bps rate cut, taking the terminal rate to 5.25 per cent,' the bank said.
Talking about when the apex bank might introduce the rate cut, ICICI said that August would be the perfect time to do so.
'When would the MPC cut the policy rate? We believe that August would be the appropriate time for the same, given the muted inflation scenario,' it added.
Inflation readings have shown broad-based moderation, largely driven by food.
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In the first quarter of FY26, inflation came in 20 basis points below the MPC's projections, while forecasts for the second and third quarters are expected to fall even further below the central bank's estimates.
Food inflation, at -1.1% year-on-year, is at its lowest in over seven years, led by a steep 19% decline in vegetable prices.
Although the drop in vegetables is partly due to a high base, similar disinflation across pulses (-11.8% YoY), cereals (3.7% YoY), and spices (-3% YoY) points to a wider trend.
The report also noted that with rainfall currently above normal, cereal output is likely to remain strong this year. Sowing activity so far is already 6% higher compared to last year.
Looking ahead, ICICI Bank expects near-term inflation readings to stay low. Meanwhile, core inflation is gradually easing.
On the external front, the report said weak global momentum is weighing down exports, with June trade data reflecting this impact.
While shipments to the US remain firm, demand from other markets remains subdued.
A mixed trend is also evident in various High Frequency Indicators (HFIs). For instance, GST collections, which had shown strong growth earlier in the year, slowed sharply to a 50-month low of 6.2% year-on-year in June (reflecting May collections).
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