RBI's bigger-than-expected rate cut is its last move for the year, economists say: Reuters poll

RBI's bigger-than-expected rate cut is its last move for the year, economists say: Reuters poll

The Reserve Bank of India will keep its key interest rate on hold at 5.50% until at least the end of this fiscal year after its big 50 basis-point cut on Friday to support slowing urban household consumption, a snap Reuters poll of economists found.

Despite official data showing Asia's third-largest economy grew a strong 7.4% last quarter, overall demand has remained weak, especially in urban areas, where household consumption has been constrained by stagnant wages.

With inflation comfortably within the RBI's medium-term target of 4% the central bank was widely expected to cut rates although only two of 61 economists in a Reuters poll taken before the decision had predicted a 50 basis-point move.

While the scale of the cut surprised economists and markets, the central bank also shifted its policy stance from "accommodative" to "neutral", signalling it would first assess how the cuts it has delivered so far in this cycle affect bank lending rates and demand revival.

All but two of 51 economists in a Reuters poll taken after the June 6 decision expected the RBI to hold the repo rate at 5.50% at its next meeting in August. A majority of those who gave forecasts through the end of the fiscal year - March 2026 - also expected rates to stay at that level.

"The 50 bps rate cut could be seen as a front-loaded event. Domestic concerns were the biggest consideration in this case. There can be a sharp global slowdown or political uncertainty abroad, which can impact fund flows into the country. It is necessary to create a safe space for domestic growth," said Debopam Chaudhuri, chief economist at Piramal Group.

Chaudhuri was one of the two economists who correctly forecast Friday's 50 bps cut in a Reuters poll last month.

"The central bank is likely to adopt a wait-and-watch strategy to gauge the efficacy of this move on resurrecting domestic demand, before committing to further relaxations," he added.

A total easing of just 100 basis points would mark the shortest and shallowest RBI rate-cutting cycle in more than a decade. In the previous two Reuters polls, economists expected 5.50% to be the terminal rate in this cycle. It has just come earlier than almost everyone expected.

Whether that will be enough to boost demand remains uncertain, especially with most key indicators pointing to a deepening slowdown. Some economists said that if conditions don't improve more rate cuts could be on the table.

"Demand is really weak. Industrial production is down, which means manufacturing isn't doing well, and most companies aren't showing profits. That's a very, very difficult position for the RBI when inflation is under control," said R.K. Gupta, managing director at Taurus Mutual Fund, who also correctly predicted Friday's big cut.

"I think they'll wait and watch for a while and probably won't cut rates again until the end of the fiscal year. But if things don't get better, more cuts could still happen."