Slower growth, under-target inflation will prompt another rate cut: BMI

BMI added that the central bank's growth and inflation forecasts for FY26 are too high, pointing to it as one of the main reasons behind the possible cuts

BMI, British research firm and subsidiary of Fitch Solutions Company, expects the Reserve Bank of India (RBI) to cut the repo rate by 25 basis points (bps) in the December Monetary Policy Committee (MPC) meeting and further by another 25 bps in early FY27, bringing the repo rate down to 5 per cent from the current 5.5 per cent. One basis point is a hundredth of a percentage point.

 

“We expect the RBI to ease by a further 25 bps in December, despite the bank’s caution about the outlook. We see another 25 bps cut early in FY27 to 5.0 per cent,” it said in a report.

 

 

The RBI retained the repo rate, the interest rate at which it lends to commercial banks, at 5.50 per cent in its October MPC meeting. The unanimous decision also maintained the ongoing ‘neutral’ policy stance.

Growth, inflation projections too high

BMI maintained that the central bank’s growth and inflation forecasts for FY26 are too high, citing this as one of the main reasons behind the possible cuts. The RBI has already revised its FY26 average inflation forecast three times this year, bringing it down to 2.6 per cent in the October meeting from 4.0 per cent in April.

 

“Even with the revisions, we still believe the projection is too high. We expect headline inflation to average just 2.0 per cent in FY26, at the lower end of the RBI’s target range, mainly due to falling food prices,” BMI said. 

 

Explaining the reasoning behind expectations of another rate cut in early FY27, BMI said, “Without another good harvest in FY27, the food-price-driven drop in inflation from FY26 will end. We expect headline inflation to average 3.8 per cent next year, just below the RBI’s 4 per cent target.”

Strong GDP growth won’t be repeated

Noting the “stellar” growth in real gross domestic product (GDP) during the June quarter at 7.8 per cent, BMI said that expansion will probably not be repeated. In line with the strong growth, the RBI has revised up its growth forecast for FY26 to 6.8 per cent from the earlier 6.5 per cent in the October MPC meeting.

 

However, BMI said that the strong growth print was partly the result of an unusually small GDP deflator and an outsized growth contribution from statistical discrepancies. “We expect goods and services tax [GST] reforms to only boost private consumption by 0.2 per cent of the GDP. In other words, the stellar expansion will probably not be repeated,” it said.

 

It expects the full-year GDP growth to be closer to its 6.0 per cent forecast rather than the central bank’s 6.8 per cent estimate.

Forward outlook: Tariffs weigh on growth

BMI further added that the 50 per cent tariffs imposed by the United States on imports from India will continue to weigh on investment. Consumption will be negatively affected as well, it said, adding that the sectors most affected, such as the apparel industry, are labour-intensive, which means tariff-related disruptions will have a significant impact on employment.