All 12 financial institutions in an ET poll predicted a quarter-percentage-point cut in the policy repo rate, or the rate at which the central bank lends to banks, to 5.75% at the June 4-6 RBI Monetary Policy Committee meeting. But the views on growth and inflation were divergent.
“The GDP print reassures that growth is not falling apart, but the underlying demand – the household demand – has slowed down significantly and remains a sore point even though the headline number looks better,” said Anubhuti Sahay, head of India economic research at Standard Chartered Bank. “From the MPC perspective, focus has to be on the weak consumption demand, private sector investment and external sector uncertainty. Growth is looking okay, but not as good as the headline number suggests.”
RBI, after falling behind other central banks in the rate-reduction cycle last year due to inflationary pressures, is now getting room to even go beyond the conventional quarter-point rate cut as inflation measured by the Consumer Price Index is below its target. The MPC is mandated to target inflation at 4% in a band of two percentage points on either side.
Retail Inflation for April slowed to 3.16% from 3.34% in March, marking its lowest level since July 2019. On the other hand, GDP grew 6.5% in fiscal 2025, according to data released on Friday, exceeding the market expectations of 6.3%. While interest rate reduction is a given, economists would be looking at what RBI does to growth and inflation forecasts, and in how detail governor Sanjay Malhotra answers questions about these factors.
The market doesn’t expect growth forecasts to be downgraded, but the inflation forecasts are what would be more interesting to watch out for, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership. “But I do expect RBI to give lower inflation forecasts.”The central bank’s current predictions are for the economy to grow 6.5% in FY26 and inflation to average 4%.Since it issued the forecasts in April, the growth and inflation outlook got muddled as the global tariff war has gone directionless with rollbacks and additional tariffs leaving economists perplexed. Although this may have an impact on growth, the inflation outlook may have improved.
India’s inflation index, where food products have an overwhelming weight, may be under the target band as weather forecasters have predicted above normal rains this monsoon season, which may translate into higher agricultural output in the largely rainfed country, keeping a lid on prices.
But given the global uncertainty over trade and tariffs, RBI could be cautious in giving out a rosy picture on inflation that may raise rate cut expectations. Its commentary could be to temper expectations.
“If the governor chooses to underplay softer inflation over the next few months and talks about the need to look at a longer-term inflation trajectory, which is expected to be a little higher, then that would be a sign that RBI is not looking for deeper cuts,” said Upadhyay.
(Institutions Polled: Barclays, HDFC Bank, Bank of Baroda, Bank of America Securities, IDFC First Bank, Standard Chartered Bank, Ujjivan SFB, Kotak Mahindra Bank, ICICI Securities PD, CSB Bank, Union Bank of India, and MUFG Bank)
