Inflation is under control, but is it time for big bang policy rate cut by RBI?

As India’s retail inflation rate has turned benign, easing to a six-year-low of 3.16% in April, and remaining within the Reserve Bank India (RBI’s) medium-term target of 4% for the third consecutive month, is it time for the banking regulator to go for aggressive monetary easing to boost economic growth.

The RBI has reduced the repo rate – the benchmark lending rate -- twice by 25 basis points each in February and April, lowering it to 6%.

Morgan Stanley is of the view that RBI’s policy approach is likely to remain countercyclical, which essentially means that the reserve bank of India may go for deeper rate reduction to boost growth. Economists have called for higher cuts, but say the timing may need to be watched out for.

“While both retail inflation and food inflation are nosediving, the regulator would also need to also stay watchful of how the tariff situation pans out and also the unfolding of the geopolitical crisis which will result in subdued demand,” said Vivek Iyer, partner, Grant Thornton Bharat.  

“We feel that more than inflation, it is the subdued demand that will play a bigger role in determining whether there is scope for more monetary easing. There seems to be a scope for a 50 basis point reduction totally in this financial year with two 25 basis point reductions in the upcoming monetary policy announcements spread in a manner in terms of how the macroeconomic data pans out,” Iyer said.  

Deloitte expects a 60% chance of 25 bps cut in the next policy meeting and suggests that the big leaps before monsoon could be a risk. “CPI inflation expectation for FY 26 is 4.2% as we are more bullish on growth and expect demand to grow faster. It may or may not be a rate cut. We will go with 60% probability of a rate cut of 25 bps in the next monetary policy committee meeting,” said Rumki Majumdar, economist, Deloitte India.   

“Such a big leap before the monsoon could be a risk. Food prices depend a lot on the consistency of rains so the RBI may want to wait and watch the movement in food prices before loosening the monetary policy over the next one quarter,” Majumdar added.

Rajni Thakur, chief economist, L&T Finance Ltd said benign inflation levels open up policy space to cut rates if growth momentum needs support. “We have already seen two cuts. A third cut may not be a given in June, as it would be largely dependent of the Q4 numbers. But definitely inflation has set the right stage for rate cut, but it largely depends on other factors as well for RBI to choose that option more confidently,” said Rajni Thakur.

The next MPC meeting is scheduled from on June 4-6.