RBI Holds Rates, Signals Potential Cut In December
The Reserve Bank of India’s Monetary Policy Committee (MPC) on Wednesday left the repo rate unchanged at 5.5 per cent, in line with expectations of a pause, while striking a dovish tone that opens the door for monetary easing later this year.With inflation falling below projections and growth expected to moderate in the second half of FY25-26, analysts said the policy stance points towards a potential 25 basis point cut in December. Barclays projected that the terminal repo rate could settle at 5.25 per cent.
The central bank revised inflation forecasts lower for the fourth consecutive time, cutting FY25-26 estimates to 2.6 per cent from 3.1 per cent. Quarterly projections stand at 2.1 per cent for Q2, 3.1 per cent for Q3, and 4 per cent for Q4, while Q1 FY26-27 is pegged at 4.5 per cent.
Barclays noted that with inflation risks easing, the RBI is positioning itself to provide support to growth after assessing the impact of frontloaded rate cuts and fiscal measures. The October policy tone was described as dovish, signalling that policy space has “opened up”.
Growth Momentum Seen Slowing
The gross domestic product (GDP) growth for FY25-26 was revised upwards to 6.8 per cent from 6.5 per cent, led by a strong first-half performance with Q1 at 7.8 per cent. However, growth is forecast to slow in H2, with Q3 and Q4 projected at 6.4 per cent and 6.2 per cent respectively, weighed by tariff pressures and weak external demand.
Bank of Baroda said that while the pause was expected, risks to growth below potential remain. With an benign inflation outlook, the central bank retains flexibility to support the economy if needed.
Yes Securities expects the repo rate to fall to 5.25 per cent this fiscal, with at least one calibrated 25 basis point cut in the remainder of FY26. It said real rates would stay positive at 1.0 to 1.25 per cent over the next year.
The brokerage also highlighted that the RBI is likely to initiate open market operations once phased CRR cuts are completed, to ensure smooth transmission in bond markets amid a recent 30 to 40 basis point rise in 10-year yields.
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