RBI monetary policy: 25-bp repo rate cut on the cards, shows BS poll

RBI expected to lower inflation projection for FY26

The Reserve Bank of India’s (RBI’s) six-member monetary policy committee (MPC) is expected to cut the repo rate by 25 basis points (bps) to 5.75 per cent, nine of the 10 respondents said in a Business Standard poll. State Bank of India, however, expects a 50-bp policy repo rate cut. 

The committee, which will meet for three days from June 4, is scheduled to announce its policy review on Friday.

All 10 respondents agreed that the RBI would lower its FY26 headline inflation projection from 4 per cent forecast in the April policy review.

  The rate-setting panel had reduced the repo rate by 25 bps in April, following a similar cut in February, after keeping it unchanged in 11 consecutive meetings. In the last review, the MPC had shifted the policy stance to accommodative, indicating the RBI’s renewed focus on supporting economic growth.

  India’s economic growth rebound to a four-quarter high of 7.4 per cent in the January-March period of FY25, aligning with the annual growth estimate of 6.5 per cent. The final-quarter performance outpaced expectations, beating the RBI’s forecast of 7.2 per cent. 

  The respondents expect the RBI to maintain its FY26 GDP growth projection at 6.5 per cent, while factoring in the potential impact of tariffs. Bilateral trade negotiations between India and the US are ongoing, with the current pause period set to end in the first week of July.

  With Consumer Price Index (CPI)-based inflation expected to remain below 4 per cent for much of FY26, respondents said the MPC was likely to maintain its monetary easing stance. CPI inflation for FY26 is tracking between 3 per cent and 3.5 per cent, suggesting that real interest rates may rise to 2.5-3 per cent if the rate remains at 6 per cent, they said. 

  “With CPI inflation forecast to trail 4 per cent for a large part of this financial year, the MPC’s monetary easing is likely to continue. A 25 bp rate reduction is expected next week, followed by two more cuts over the subsequent policy reviews, taking the rate to 5.25 per cent by the end of the cycle,” said Aditi Nayar, chief economist at Icra.

  India’s retail inflation eased further in April, slipping to 3.16 per cent from 3.34 per cent in March, driven by a sharp decline in vegetable and pulse prices. This marked the lowest CPI inflation since July 2019, when it stood at 3.15 per cent. Food inflation also dropped significantly, hitting a 42-month low of 1.78 per cent in April, compared to 2.69 per cent in March.

  The decline was primarily led by an 11 per cent year-on-year fall in vegetable prices and a 5.23 per cent drop in pulses, the steepest in over six years.

  “There could be some downward revision in the CPI inflation estimate from 4 per cent. Food inflation has shown broad-based deceleration across vegetables, pulses, and cereals,” said Gaura Sen Gupta, chief economist, IDFC FIRST Bank.

  She, however, said the outlook for food inflation would depend on the distribution of the monsoon. “Given this uncertainty, the RBI would prefer to maintain some buffer in its estimates for potential food price shocks. FY26 CPI inflation could be revised down to 3.8 per cent,” she said.