India’s central bank will likely cut interest rates for the third straight meeting to boost growth, with market watchers focused on the extent of easing in this cycle.
The Reserve Bank of India will lower the benchmark repurchase rate by 25 basis points to 5.75%, according to all but one of the 34 economists surveyed by Bloomberg. The central bank is also expected to maintain its ‘accommodative’ stance, signaling a more supportive outlook for the economy amid global headwinds.
India’s 6.5% expansion in the fiscal year through March 2025 marked a notable slowdown from the 8% average seen in recent years. Shifting trade dynamics amid US President Donald Trump’s sweeping tariffs are further clouding economic prospects, giving the central bank enough reasons to lower borrowing costs.
Easing consumer-price growth is also providing the rate-setters some comfort, with the headline inflation slowing to the lowest in nearly six years in April.
“Early indications of what the RBI is thinking about the length of the easing cycle could come from the policy statements” on Friday, said Pranjul Bhandari, an economist with HSBC Holdings Plc. She expects the RBI to deliver a quarter-point cut each in June and August, before pausing to evaluate the transmission of rate cuts.
Governor Sanjay Malhotra is scheduled to announce the rate decision in a televised address at 10 a.m. in Mumbai on Friday. Here’s what analysts will watch out for:
Growth and Inflation
A sharp fall in vegetable prices is likely to keep inflation below the RBI’s 4% target in May and June, economists say. An early onset of the monsoon rains, which irrigate about half of the country’s farmland, will also help keep prices in check.
That may push the central bank to revise its inflation forecast lower for the first six months of the fiscal year by 0.4-0.5 percentage points, Citigroup Inc. economists including Samiran Chakraborty wrote in a note this week.
Around 3-3.5% inflation in April-September period “and limited upside risk on the horizon could create space for the monetary policy committee to maintain a dovish guidance,” they wrote.
Central bank watchers expect the Governor to retain its 6.5% growth forecast for the current fiscal year. While India’s economy expanded faster than expected in the January-March period, growing trade uncertainties are weighing on sentiment. Investors will closely watch Malhotra’s speech and the press conference at noon to understand the impact of US tariffs on the economy.
The latest growth print “is more of an anomaly” and the economic momentum heading into the current year will remain weak, said Kunal Kundu, an economist at Societe Generale Group. “This would mean that RBI would continue to ensure that monetary policy would be supportive of growth.”
Rate Trajectory
The RBI has generally maintained a data-dependent approach to future rate cuts and refrained from giving any guidance on its potential moves. Still, market watchers will closely examine the language to gauge how deep the cuts could go in this cycle.
Bank of America Securities is forecasting a terminal rate of 5.5%, while Societe Generale sees it at 5%.
Liquidity Measures
Excess cash in the banking system currently stands around 3.1 trillion rupees ($36 billion), the highest since July 2022, amid the central bank’s liquidity infusion and record dividend payout to the government. The excess funds have pushed shorter yields down, with those on treasury bills to company bonds all trading near multi-year lows.
Analysts are also waiting on RBI’s liquidity framework review, with some suggesting moving the operating rate which monetary policy targets to a more representative rate based on secure funding markets, instead of the weighted average call rate at present.
The benchmark yield can drop to 5.5%, a level last seen during the global financial crisis, if the easing coincides with slower global growth and lower oil prices, according to Aberdeen Investments’ head of Asia sovereign debt Kenneth Akintewe.
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