RBI Policy: Why the MPC is likely to cut repo rate for the third consecutive time | Business News

“We expect RBI to cut policy rates by 25 bps in June. The space to cut policy rates is derived from sharp deceleration in inflation. Meanwhile, given the uncertainty on demand conditions both domestic and external, growth requires money policy support,” said IDFC First Bank Chief Economist, Gaura Sengupta.

Headline inflation, as measured by year-on-year changes in the all-India consumer price index (CPI), moderated to 3.2 per cent in April, the lowest since July 2019, from 3.3 per cent in March. The easing in CPI has been driven by the sustained fall in food prices.

Economists said that with inflation remaining below the 4 per cent target in the last three months (February, March and April), and a sharp fall in food inflation, CPI is likely to durably align with the 4 per cent target over a 12-month period.

Under the flexible inflation targeting (FIT) framework, the RBI has been mandated by the government to maintain CPI at 4 per cent with a band of +/-2 per cent.

“The benign inflation outlook and moderate growth warrant monetary policy to be growth supportive, while remaining watchful about the rapidly evolving global macroeconomic conditions,” the RBI said in the annual report for 2024-25.

State Bank of India’s Group Chief Economic Adviser Soumya Kanti Ghosh said, “We expect a 50-basis point rate cut in June 2025 policy as a large rate cut could reinvigorate a credit cycle.”

If RBI reduces the repo rate by 50 bps, the 10-year benchmark yield is likely to fall by 10-15 bps. On Thursday, yield on the new 10-year bond (6.33%-2035) closed at 6.19 per cent.

The MPC’s announcement will come a day after the European Central Bank (ECB) announced to lower the interest rate by 25 bps. Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2 per cent, 2.15 per cent and 2.4 per cent respectively, with effect from June 11, 2025.

Will there be a change in the policy stance?

The MPC is likely to retain the monetary policy stance as ‘accommodative’, analysts said.

In the April policy, the rate-setting panel had changed the stance from neutral to accommodative.

Will RBI revise GDP and inflation forecast?

According to economists, the RBI is likely to revise its projections on real gross domestic product (GDP) and inflation for FY2026.

“The commentary on both growth and inflation will be important as there are expectations of revisions in their forecasts for both the parameters. It is also expected that the RBI will detail its analysis on how the global environment would be affecting the Indian economy considering that the tariff reprieve provided by the USA would end in July,” said Madan Sabnvis Madan Sabnavis, Chief Economist at Bank of Baroda.

As per the RBI’s estimate, CPI inflation for 2025-26 is expected to be at 4 per cent. The easing of supply chain pressures, softening of global commodity prices and higher agricultural production on the back of a likely above-normal south-west monsoon augur well for the inflation outlook in 2025-26, the RBI’s annual report said.

“Any potential downward revision in FY26 CPI inflation will be closely watched, as it will provide an indication of the depth of the rate cutting cycle,” said IDFC First Bank’s Sengupta.

The real GDP growth for 2025-26 is projected at 6.5 per cent. In the quarter ended January-March 2025, the domestic economy picked up pace and grew at a four-quarter high of 7.4 per cent. For the financial year 2024-25, the growth rate stood at 6.5 per cent, which was a four-year low.

“The Indian economy is poised to sustain its position as the fastest growing major economy during 2025-26, supported by pickup in private consumption, healthy balance sheets of banks and corporates, easing financial conditions and the government’s continued thrust on capital expenditure,” the RBI’s annual report said.

How would a repo rate cut impact borrowers?

If the repo rate is reduced by 25 bps, all external benchmark lending rates (EBLR) linked to it will decline by a similar margin. It would be a relief for borrowers as their equated monthly instalments (EMIs) on home and personal loans will drop by 25 bps.

Following a 50 bps cut in the repo rate since February 2025, most banks have reduced their repo-linked lending rates by the same magnitude. Lenders have also lowered their marginal cost of funds-based lending rate (MCLR).

Is RBI likely to cut the repo rate further?

Following the likely repo rate cut in the June policy, the RBI may go for a total reduction of 50 bps in the current financial year, experts said.

“Two more cuts over the subsequent two policy reviews are expected, taking the repo rate to 5.25 per cent by the end of the cycle,” said Aditi Nayar, Chief Economist, ICRA Ltd.

“We expect a 25bp rate cut at the upcoming June 6 meeting, followed by another in August, taking the repo rate to 5.5 per cent,” HSBC Global Research said in a report.

The RBI may pause in October to evaluate the transmission of monetary policy to lending and deposit rates.

“We forecast a final rate cut in December, although much will depend on the state of growth around then,” the report said.