RBI's growth outlook is optimistic amid global concerns; see 50bps more cut

We expect the GDP growth to print at 6.2 per cent in FY26, marginally below the 6.3 per cent projected by us for FY25, said Aditi Nayar of Icra

As was largely expected, the Monetary Policy Committee (MPC) unanimously cut the policy repo rate by 25 bps in its first bi-monthly policy meeting for fiscal year 2025-26 (FY26). Simultaneously, it also changed the stance to accommodative from neutral, signaling a decisive shift to further monetary easing in the near-term amid a benign inflation and moderate yet uncertain growth outlook.

 

Interestingly, the RBI Governor clearly spelled out the interpretation of the policy stance, which had been a point of contention earlier. The clarity that the stance is linked to policy rate guidance and not directly to liquidity clears the confusion around the same and is much-appreciated. The change in stance to accommodative now clearly suggests that rates are likely to come down further from the current levels. 

 

The policy decisions reflect the concerns around the growth outlook, amid the uncertain external environment and the impact of the ongoing global trade war on domestic growth outcomes. The MPC reduced its FY26 gross domestic product (GDP) growth forecast by 20 basis points (bps) to 6.5 per cent from 6.7 per cent previously, highlighting that this largely reflects the impact of the global trade and policy uncertainties. This cut is not evenly distributed through the fiscal; the GDP growth forecast for Q1, Q2, and Q4 FY26 have been reduced by 20, 30, and 20 bps, respectively, even as that for Q3 has been raised by 10 bps.

 

ICRA believes that the MPC’s growth outlook is somewhat optimistic given the global concerns. We expect the GDP growth to print at 6.2 per cent in FY26, marginally below the 6.3 per cent projected by us for FY25, and lower than our previous forecast of 6.5 per cent for the current fiscal.  

 

Global uncertainty and potential changes in trade patterns will likely weigh on investment decisions and manufacturing output in the early part of the fiscal, which could dent the growth print to sub-6 per cent in the ongoing quarter. However, some recovery is likely thereafter as a portion of the uncertainty subsides and more clarity emerges around the changes in global trade patterns. Nevertheless, the situation is quite fluid and will entail a continuous monitoring of the incoming high frequency data.

 

Battle with inflation

 

On the inflation front, amid the sharp reduction in the price of crude oil, the MPC cut its FY26 consumer price inflation (CPI) inflation projections by 20 bps to 4 per cent from 4.2 per cent previously. 

 

This largely stems from a sizeable 90 bps reduction in its forecast for Q1, even as the projections for the other three quarters were not tweaked significantly. More importantly, the MPC has highlighted that there was that there was greater confidence of a durable alignment of headline inflation with the 4 per cent target over a 12-month horizon, which is likely to have given it the confidence to change the stance. 

 

While we broadly concur with the MPC’s CPI inflation forecast for FY26, we believe that the Q1-FY26 estimate seems somewhat optimistic. The impact of the heatwaves on perishable prices and the monsoon outlook would be the key monitorables in the near-term, which could have a material impact on the food inflation trajectory for FY26.

 

Given this context, there is space for the MPC to cut the policy rate by another 50 bps over the next three policy meetings. The exact timing of the rate cuts would depend on the assessment of the impact of the trade war on India’s growth, as reflected in the incoming high frequency data, as well as more clarity on the known unknowns, including relative tariffs and prospective trade agreements on global trade patterns.

 

Aditi Nayar, Chief Economist, Head- Research & Outreach, ICRA. Views are personal.