The Reserve Bank of India in its last two monetary policy meetings has reduced the benchmark rate by 25 bps each, in February and then in April, with the current benchmark repo rate at 6 percent while the stance remains ‘accommodative’.
Since the last monetary policy, India’s CPI inflation has trended lower with a 3.16 percent reading for April 2025, and with core liquidity in surplus. Meanwhile, the global geo-political situation has remained fragile in various parts of the world.
The real GDP growth for Q4FY25 was at 7.40 percent, higher than 6.40 percent (revised from 6.20 percent) seen in the Q3FY25. The overall real GDP growth for FY25 stood at 6.50 percent, as per provisional estimate, which is lower than the FY24 figure of 9.20 percent.
During this quarter, America’s GDP growth was reported at -0.2 percent, with different economies growing in-line with their corresponding fundamentals. The International Monetary Fund (IMF) has projected India’s growth at 6.20 percent for FY26, which is higher than any other major economy, and driven by domestic factors.
The RBI in its April 2025 policy projected the FY2025-26 GDP growth at 6.50 percent and given the backdrop, we expect this projection to remain unchanged in the upcoming June 2025 policy.
The headline inflation data for April was reported at 3.16 percent, which is lowest since July 2019, and lower than the 3.34 percent reading of March 2025. India’s food inflation stood at 1.78 percent in April, which has been lowest since October 2024. The core inflation however has been around 4.10 percent in April. Moreover, as per IMD projections, India is expected to receive normal-to-above-normal rainfall this year, which is favourable for kharif crops. Recently, the Cabinet Committee on Economic Affairs (CCEA) raised in minimum support price (MSP) for Kharif season 2025-26, however, it is likely to have minimal implication on headline inflation as price hike for certain crops with higher weights in CPI is lower as compared to the last year. The RBI has projected the FY26 headline inflation at 4 percent in April, and we expect them to lower the forecast to 3.80-4 percent in the June policy.
On the liquidity front, the RBI has been actively pouring in liquidity since the beginning of 2025. As on May 31, 2025, the banking system liquidity stood at Rs 2.33 lakh crore surplus. Furthermore, the banking system liquidity as on May 2025 has been around ~0.7 percent of NDTL (lower than one percent of NDTL which the RBI intends to maintain). Moreover, the RBI declared dividend of Rs 2.69 lakh crore to the Centre for FY25 which has increased the core liquidity to around Rs 6 lakh crore as on May 31, 2025. The weighted average call rate (WACR) has remained 22 bps below the repo rate as on May 29, 2025. To maintain adequate liquidity in the system, RBI has conducted back-to-back Market Operation (OMO) bond purchases cumulatively over last few months amounting to Rs 5.22 lakh crore.
Meanwhile, bond yields in US have surged with the 10-year bond yield surpassing 4.50 percent before cooling off marginally. We have also seen the Japanese bond yield spike for longer-dated bond. The uncertainty related to US trade policies / tariffs continue to cast shadow on the global macro environment.
So far, the US FOMC has kept the key rates unchanged in all its policies in 2025. As of now, the market is pricing in two rate cuts of 25 bp each by FOMC in 2025. However, the Fed meeting on June 16-17, 2025 will be associated with the Summary of Economic Projections which may further provide guidance for rate cuts in the US. The spread between US yields and Indian 10-year benchmark bond yields have compressed to ~170 bps so far. While the spread has narrowed all the way from ~500 bps couple of years back to ~170 bps now which indicates reduced risk premia for the Indian macro economy. Given the relative economic performance, further compression in bond spreads may not be ruled out however shall remain limited. Given this backdrop, we observe that the changes in world economic order is evolving.
The recent prints of inflation - which is below the median target of 4 percent set by the RBI and the surplus liquidity – leads us believe that the RBI may cut the repo rate by 25 bps to 5.75 percent and to maintain the stance to ‘accommodative’ in the June 2025 policy. There is an outside chance for MPC to widen the Repo-SDF (standing deposit facility) spread from 25 bps to 50 bps, resulting in a 50 bps transmission with 25 bp rate cut. However, going ahead we expect additional 25 bps rate cut by October 2025.
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Abhishek Bisen of Kotak expects the RBI to cut the repo rate by 25 bps to 5.75 percent and to maintain the stance to “accommodative” in the June 2025 policy.
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