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The prospect of back-to-back rate cuts by the Reserve Bank of India (RBI) has gained momentum, fueled by a lower-than-anticipated retail inflation figure for February and growing confidence that inflation will converge closer to the RBI's target of 4% in the upcoming financial year (FY26). A recent Financial Express (FE) poll involving 12 economists revealed a consensus expectation that the central bank might implement another 50-basis point reduction in the policy repo rate during FY26. This anticipated move reflects a broader sentiment among economists that the current macroeconomic conditions warrant a more accommodative monetary policy stance to stimulate economic growth. However, this optimism is tempered by underlying concerns about potential inflationary pressures stemming from global factors, such as escalating global tariff wars initiated by the United States, the persistent threat of imported inflation, the continuous depreciation of the Indian rupee against the US dollar, and the potential surge in prices of essential food commodities. These external and internal risks represent significant challenges to maintaining price stability and could potentially derail the RBI's efforts to achieve its inflation target. The interplay between these factors and the RBI's monetary policy decisions will be crucial in shaping the trajectory of the Indian economy in the coming months. The economists surveyed by FE largely anticipate that the RBI's Monetary Policy Committee (MPC) will opt for a 50-basis point reduction in the policy rate, implemented through two consecutive meetings, specifically in April and June. This sequential approach to rate cuts suggests a cautious and data-dependent approach by the MPC, allowing them to assess the impact of each cut on inflation and economic growth before committing to further easing measures. Currently, the repo rate stands at 6.25%, a level that has been maintained for several months as the RBI carefully monitors the economic landscape. The proposed rate cuts would bring the repo rate down to 5.75%, a level that is expected to provide a boost to borrowing and investment activity, thereby supporting economic expansion. Dhiraj Nim, an economist at ANZ Research, predicts two more rate cuts of 25 basis points each in April and June, contingent on the absence of extreme weather events that could disrupt agricultural production and exacerbate inflationary pressures. Nim further suggests that the RBI might need to revise its FY26 inflation forecast downward by 20-30 basis points, reflecting a growing belief that inflation is likely to remain subdued in the medium term. The RBI has projected CPI inflation to average 4.2% in FY26, a decrease from the 4.8% projected for FY25. For the fourth quarter of FY25, the RBI had estimated inflation to average 4.4%. However, the recent inflation print of 3.61% has led economists to anticipate a March quarter CPI figure in the range of 3.8-4%, and an overall full-year inflation rate of 4.7%. Madan Sabnavis, the chief economist at Bank of Baroda, echoes the expectation of a 50-basis point rate cut in total, with one cut anticipated in April and the other in August. Sabnavis emphasizes that the RBI will closely monitor the monsoon season before considering any further rate reductions, highlighting the crucial role of agriculture in influencing inflation dynamics in India. The performance of the monsoon, which is vital for agricultural output, significantly impacts food prices and, consequently, overall inflation. A favorable monsoon season is expected to dampen inflationary pressures, while a deficient monsoon could lead to a surge in food prices and necessitate a more cautious approach to monetary easing.
The growing calls for successive rate cuts have been amplified by the recent GDP data, which revealed a slower pace of economic growth in India than previously anticipated. The National Statistical Office (NSO) revised the GDP growth figure for FY24 to 9.2%, a 100-basis point increase from its initial provisional estimate of 8.2%. This revision indicates a more robust economic performance in FY24 than initially projected. However, it also implies that the slowdown in economic growth in FY25 was more pronounced than previously believed. The NSO estimates that growth likely decelerated sharply by 2.7 percentage points (pps) in FY25 (6.5% estimated by NSO), compared to the previously estimated slowdown of 1.7 pps. This revised understanding of the economic trajectory underscores the need for supportive monetary policies to stimulate economic activity. Gaura Sen Gupta, the chief economist at IDFC FIRST Bank, argues that monetary policy should actively support growth, particularly given the clear indication that inflation is sustainably converging towards the target. She emphasizes that the projected inflation rate of 4% or lower in FY26 would push the real rate of interest (the difference between the repo rate and the headline inflation rate) above 2%, which could exert downward pressure on economic growth. The real rate of interest is a crucial indicator of the overall monetary policy stance. A higher real interest rate tends to dampen borrowing and investment, while a lower real interest rate encourages economic activity. Therefore, maintaining an appropriate real interest rate is essential for balancing inflation and growth objectives. Analysts view the real rate of interest as an equilibrium rate, representing a level where growth is close to its potential, while maintaining stable inflation. In July 2024, the RBI estimated the real rate of interest to be in the range of 1.4-1.9%. This estimate provides a benchmark for assessing the current monetary policy stance and guiding future policy decisions. A Prasanna, the chief economist at ICICI Securities Primary Dealership (I-SEC PD), suggests that the April meeting of the MPC would be an opportune moment to shift the policy stance to signal greater confidence in the durability of the cutting cycle and to solidify the improved and more accommodative liquidity regime. A change in policy stance would likely involve signaling a commitment to further rate cuts in the future, contingent on economic data and evolving conditions. This communication strategy is intended to provide greater clarity and predictability to market participants, thereby reducing uncertainty and fostering confidence.
Despite the growing consensus for rate cuts, some economists caution that imported inflation continues to pose a significant threat, even as headline inflation declines. According to SBI Research, the share of imported inflation in the CPI basket increased sharply to 31.1% in February, from a mere 1.3% in June 2024. This surge in imported inflation is primarily attributed to rising prices of precious metals, oils and fats, and chemical products. The increased reliance on imports for these essential commodities makes the Indian economy more vulnerable to fluctuations in global prices and exchange rate movements. Soumya Kanti Ghosh, the group chief economic adviser at SBI, warns that the pass-through of rupee depreciation will become increasingly visible in the coming months, potentially pushing CPI inflation higher. A weaker rupee makes imports more expensive, which can translate into higher prices for consumers. This dynamic underscores the importance of managing exchange rate volatility to mitigate the impact of imported inflation. QuantEco Research, in a recent report, highlighted that the rupee's 4.5% depreciation against the dollar since September 2024 is likely to add upward pressure to CPI inflation in the coming months. The report also pointed to the budgetary push for domestic consumption in FY26, coupled with the easing of monetary policy from February 25, as factors that could allow corporates to pass on higher imported costs to consumers. This combination of factors suggests that while domestic demand may increase due to government spending and lower interest rates, it could also lead to higher inflation if businesses are able to raise prices to offset their increased import costs. Therefore, the RBI faces a complex challenge in balancing the need to stimulate economic growth with the need to control inflation. The effectiveness of monetary policy will depend on its ability to navigate these competing pressures and to maintain price stability in the face of global uncertainties and domestic economic dynamics. The interplay of domestic policies, global economic trends, and the RBI's strategic interventions will be critical in shaping India's economic future.