Slowing growth, cooling inflation may spark 25bps repo cut

Out of the 15 respondents, 14 said the central bank’s rate-setting panel will unanimously vote for a 25 basis points repo rate cut to 5.75%, keeping the policy stance unchanged at accommodative. The MPC is expected to announce the decision on 6 June.

“We expect the MPC to repeat the 25bps repo rate cut in the June policy meeting to 5.75%, with terminal rate in the ongoing policy cycle seen at 5.50% by August. Subdued inflation trending below 4% target in FY26, amid growth slowdown concerns in an uncertain and volatile world, is likely to drive the monetary policy committee to persist with growth heavy lifting," said Kanika Pasricha, chief economic advisor, Union Bank of India.

Sharper cut?

State Bank of India’s chief economist Soumya Kanti Ghosh expects the MPC to go for a sharper cut of 50 bps. He believes a larger cut is essential to spur growth, which fell to 6.5% in FY25, the slowest since FY21.

“A larger rate cut could be a counterbalance to rising uncertainty and reinvigorate a credit cycle with a lag. Also, with inflation supposed to be now closer to 3.5%, a faster cycle of jumbo rate cut could justify the move," said Ghosh.

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For the calendar year, economists are expecting more rate cuts of 25-75 bps points till December this year.

Since the last policy, concerns about the US tariffs hurting growth seem to have abated. RBI governor Sanjay Malhotra said in an interview with Times Of India earlier this month that the impact will be moderate, given that domestic factors remain resilient. In April,US president Donald Trump announced a steep 26% reciprocal tariff on India, despite the two countries agreeing on negotiating a trade deal. Later, the tariffs were paused till 8 July.

Q4 recovery

While FY25 growth fell to 6.5% from 8.2% in FY24, Q4 GDP growth improved to 7.4% from6% in H1FY25. Economists believe this recovery over the second half of FY25 bodes well for the current year’s growth outlook, which RBI has estimated at 6.5%.

“Although India’s GDP growth in Q4 FY25 posted a sizable positive surprise, it is unlikely to change the narrative of the economy operating below its potential. This would vindicate the RBI’s accommodative policy stance. Heightened global spillover risks, along with the likelihood of undershooting of domestic inflation vis-à-vis the 4% target for four consecutive quarters in 2025, will prompt the MPC to opt for a 25 bps rate cut at its upcoming policy review on 6 June," said Vivek Kumar, economist, QuantEco Research.

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Retail inflation has also moderated since the April policy. The Consumer Price Index (CPI) fell to 3.16% in April from 3.34% in March. Given the early onset of the monsoon, food inflation may ease, and agricultural production may improve this year, according to RBI's annual report.This is likely to keep inflation at around 4% during the current fiscal year. Some of the economists polled expect MPC to lower the inflation estimate.

Inflation revision

“There could be some downward revision in CPI inflation estimate from 4%," said Gaura Sen Gupta, chief economist, IDFC First Bank. "Food inflation has shown broad-based deceleration spread across vegetables, pulses and cereals. The outlook for food inflation will depend on the distribution of the monsoon. Meanwhile, core inflation has remained consistently low for the last two years, showing the presence of a negative output gap. Given the uncertainty on monsoons, RBI would like to keep some buffer in its inflation estimate for potential food price shocks. FY26 CPI inflation could be revised down to 3.8%," Sen Gupta said.

Meanwhile, liquidity continues to remain in surplus at ₹1.6 trillion. RBI hasbeen supplying liquidity on a daily basis through overnight variable repo rate (VRR) auction. It is also expected to infuse further liquidity through open market operations or purchase of government bonds totalling ₹5 trillion over next 5 months. Malhotra in his last policy had assured that RBI will keep surplus liquidity near 1% of net demand and time liabilities (NDTL), which is around ₹2.7 trillion, to ensure transmission of policy rates.

Banks have started passing on the past two rate cuts to borrowers and depositors, albeit at a slower pace. According to RBI’s annual report, the weighted average lending rates on fresh and outstanding rupee loans of banks declined by 2 bps and 8 bps, respectively in FY25. In the case of deposits, weighted average domestic term deposit rates on fresh and outstanding deposits increased by 3 bps and 14 bps, respectively in FY25.

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