RBI Anticipates Further Interest Rate Reductions Ahead

The Reserve Bank of India unexpectedly slashed interest rates by 50 basis points, aiming to bolster economic growth. Despite shifting to a ‘neutral’ policy stance, analysts anticipate an additional 25 basis point cut, bringing the rate down to 5.25%.

• The Reserve Bank of India surprised most analysts, including us, by cutting by a larger 50bps than the 25bps expected at its June meeting.
• Governor Sanjay Malhotra appeared to close the door on further cuts in FY2025/26 in his statement, saying that policy space is now ‘very limited’.
• However, we think the Bank’s growth forecast is too optimistic and its inflation forecast is too cautious and expect a further 25bps cut to 5.25% in December.

While the Reserve Bank of India cut interest rates at its June meeting as we and 53 out of 61 economists polled by Reuters had expected, it was by a larger 50bps to 5.5%, compared with the 25bps we and most analysts expected. Governor Sanjay Malhotra cited a permissive inflationary outlook, not least due to falling commodity prices, as well as a need to support economic growth, as the justification for the cuts. Any suggestion that the easing floodgates were now open was undercut however, by the fact that the Bank also changed its monetary policy stance from ‘accommodative’ to ‘neutral’. Furthermore, the Governor stressed that ‘monetary policy is left with very limited space to support growth’.

It would seem therefore, that the Bank has decided to frontload its easing to give it more time to feedthrough to the economy and that no further cuts are forthcoming in FY2025/26 (April-March). However, we think the governor is probably too optimistic on growth and too cautious on inflation. We further think that in the 10 months or so remaining in FY2025/26, there will be opportunities and  motivation to ease further. We therefore expect the Bank to lower rates further to 5.25% by the end of FY2025/26, compared with 5.50% previously (see chart below). 

The Reserve Bank of India (RBI) remains cautious in its approach to interest rates as it addresses the challenges of the Indian economy. Amid ongoing global economic uncertainties, the RBI has signaled that further rate cuts may still be on the table. This strategy seeks to boost economic growth while maintaining control over inflation, underscoring the bank’s dedication to balancing recovery efforts with price stability.

Inflationary pressures have been a major concern for the RBI. However, recent data indicates a gradual easing, prompting officials to consider additional measures to boost domestic consumption. By choosing to maintain steady rates rather than implementing aggressive cuts, the RBI retains the ability to adapt to changing economic conditions. Analysts suggest that this cautious approach provides the flexibility needed to effectively balance growth and inflation.Read More