RBI poised to cut rates as India eyes a steady takeoff

Mint

2 days ago

As India enters a new fiscal year marked by evolving global complexities and domestic resilience, the focus of monetary policy is likely to continue towards supporting growth, without compromising price stability.
The Reserve Bank of India (RBI) is expected to deliver another 25 basis points (bps) repo rate cut in its 6 June policy meeting, bringing the policy rate down to 5.75%. This would mark the third consecutive cut since February 2025, signalling a proactive approach to easing financial conditions with the objective of stimulating credit and investment, while ensuring a durable alignment of the 4% CPI target.
The policy stance turned accommodative in April and is likely to continue as RBI balances near-term cyclical risks with a forward-looking view on India's structural growth prospects.
The central bank will likely maintain its FY26 growth forecast of 6.5%, while possibly lowering its CPI inflation forecast to 3.8%, from 4.0% earlier. In the April policy, RBI revised both the growth and inflation forecasts lower by 20bps to 6.5% and 4.0%, respectively.
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The policy coordination between the government and RBI remains the strongest at this juncture, with the fiscal and monetary authorities showing strong resolve to do "whatever it takes" to prevent India's growth from slipping much below its potential. In addition, the various supply-side reforms initiated over the past 10 years have also demonstrated India's potential to remain the fastest-growing major economy for years to come.
This will likely lead to increased global investments in India to take advantage of the economies of scale and to cater to its large domestic market. In this backdrop, it will not be entirely surprising if India emerges as a net beneficiary once the dust settles down eventually on the tariff arithmetic.
Inflation in check
The early onset of the monsoon has already led to a 10-25% rise in key vegetable prices, including tomatoes and leafy greens. Despite a projected 2.3% month-on-month increase in food prices during June and July, headline CPI inflation is expected to remain around 3.1-3.2% year-on-year due to a favourable base effect.
However, a sharper spike, similar to July 2023's 214% surge in tomato prices, could temporarily push inflation to 4.1-4.2%. This is expected to normalise by September, suggesting any inflation spike will be short-lived and unlikely to materially affect the full-year outlook. Nonetheless, such volatility may prompt RBI to pause in its August review.
Adding to the monetary backdrop, the RBI's record ₹2.7 trillion dividend transfer to the government will significantly enhance fiscal headroom, as the FY26 Union Budget had factored in ₹2.3-2.4 trillion in non-tax revenue from RBI dividend.
The transfer is set to push durable liquidity into deeper surplus territory—estimated to exceed ₹5 trillion, or nearly 2.5% of Net Demand and Time Liabilities (NDTL)—bringing short-term money market rates closer to the Standing Deposit Facility (SDF) rate, which is 25bps below the repo rate.
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Combined with a 25bps rate cut, easing liquidity will result in an 'effective easing" of 50bps in June. This is already reflected in the overnight call money rate, which is currently trading 15bps below the current 6.00% repo rate. Such conditions are expected to accelerate the transmission of policy cuts into lower lending and deposit rates, supporting credit growth.
In this backdrop, it will be keenly watched whether RBI allows outstanding forwards for the next three to four months (~ $5 billion each month) to mature in order to reduce excess liquidity in the banking system.
Future positive
Looking ahead, RBI will possibly pause in August and deliver a final 25bps cut in October, bringing the repo rate to 5.50%. This would likely anchor short-term rates around 5.25%, factoring in surplus liquidity.
Even with headline inflation likely to average below 4% in FY26, maintaining a cushion in real rates is essential, especially amid potential food price spikes. FY27 forecasts of 6.5% GDP growth and 4.0% CPI inflation (compared to the RBI's 6.7% and 4.3%) support a terminal repo rate of 5.50%, with further cuts deemed excessive.
India's growth outlook remains resilient amidst various global risks. In 2019, when RBI cut the repo rate from 6.50% to 5.15% (before the pandemic in 2020), growth fell below 5% that year due to the lagged impact of the IL&FS crisis. In 2025, growth is projected at 6.0-6.5%, even with global tariff uncertainties. Therefore, the repo rate need not fall below 5.50% in this cycle.
If the repo rate is cut more than 5.50%, it could prompt markets to anticipate an earlier reversal, thereby introducing volatility and undermining RBI's preferred strategy of easing and holding rates steady for a longer time horizon to allow economic adjustment.
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The U.S. Federal Reserve, which cut rates by 100bps in 2024, has also paused further easing amid global complexities. Another 75bps of Fed cuts are expected by Q1 2026. In this context, a 100bps cumulative cut in India's repo rate—equivalent to 125bps of effective easing—appears balanced.
Ultimately, India's monetary policy will be shaped not only by short-term inflation and growth dynamics but also by structural shifts in the post-pandemic economy, global capital costs, and geopolitical uncertainties. A total of 100bps in repo rate cuts this cycle, with a continued accommodative stance, seems both prudent and well-calibrated.
Kaushik Das is chief economist—India, Malaysia, and South Asia, Deutsche Bank AG