Slow economic growth, inflation, monsoon: Much more on table as RBI likely to cut rates

As the Reserve Bank of India (RBI) heads into the conclusion of another Monetary Policy Committee (MPC) meeting on Friday, markets are broadly anticipating a familiar outcome- a third consecutive rate cut.

Economists and banking experts widely expect the central bank to reduce the repo rate by 25 basis points, citing a weaker GDP growth and lower-than-expected inflation as key enablers of continued monetary easing.

According to a Reuters poll, a majority of experts expect the RBI to announce a 0.25 per cent rate cut on June 6, with another reduction likely in August. A smaller group of respondents, however, believe the central bank may opt for a sharper 0.50 per cent cut.

"Market consensus is a 25-bps rate reduction in the coming policy. Expectations of muted growth ahead, along with lower inflation expectations, create an ideal scenario for a rate cut," said Lakshmanan V, Group President and Head of Treasury at Federal Bank.

India's slowing inflation, well within the central bank's target range of 2 per cent to 6 per cent, has emerged as a key factor driving expectations of further monetary policy easing. Retail inflation eased to 3.16 per cent in April, the lowest level since July 2019, strengthening the case for a rate cut. 

"Retail price pressures are easing and therefore it becomes easier for the MPC to prioritise a growth push," according to S Adikesavan, an economist and banking expert. He added that a rate cut would help stimulate economic activity by reducing borrowing costs, thereby boosting domestic demand.

Adikesavan also stood by the possibility of a 25 basis point reduction in the monetary policy. "The effort now should be to support growth, which is facing headwinds due to global developments, particularly the 'tariff tantrums'," he said. 

The threats posed by US President Donald Trump's tariff 'war' continue to loom over India, with policymakers in New Delhi racing to seal a trade deal with Washington before the 90-day tariff suspension expires. Moreover, recent government data shows that India's GDP growth slowed to 6.5 per cent for the financial year 2024–25. Growth in the fourth quarter also decreased to 7.4 per cent from 8.4 per cent in the same period last year.

This unique set of economic conditions is likely to prompt RBI policymakers to favour a rate cut aimed at stimulating growth. A reduction in interest rates combined with easing inflation could bolster consumer demand, thereby driving manufacturing and overall economic activity.

"A rate cut could spur economic growth, and the RBI is likely to play that card," said Pradeep KS of Canara Bank and convenor of the State Level Bankers' Committee. He expects the RBI to cut the rates by 25 basis points but does not rule out a 50 bps reduction.

Lakshmanan also conveyed a similar sentiment, adding that a rate cut would improve the country's overall investment sentiment. "RBI stance on liquidity and rate is to support the growth and to tide through global uncertainty. Cheaper and easier credit will move to the needy section and will improve investment sentiment. The reduced rates transmitting to the real economy will benefit overall demand in the economy," he said. 

Moreover, the India Meteorological Department's prediction of a favourable monsoon this year is also likely to influence policymakers to adopt a dovish stance. "This is positive for the primary sector. The MPC will need to ride on a favourable and bountiful monsoon," said Adikesavan.

Lakshmanan noted that a bountiful monsoon could boost rural growth and the agricultural sector, helping to keep inflation in check and prevent a spike in vegetable prices. "Rural growth and agricultural output will improve, thus contributing to muted inflation. While an early monsoon may initially cause a spike in vegetable prices, it is expected to normalise within 2–3 months," he said.

The RBI has began its policy easing cycle in February when it cut the rates by 0.25 per cet to 6.25 per cent. The central bank adopted a similar move in its April meeting, reducing the rate further to 6 per cent. Following these rate cuts, most banks lowered their interest rates on loans, providing much-needed relief to borrowers and boosting liquidity in the economy.

However, government bonds have absorbed the impact of the repo rate reduction, with the 10-year bond yield falling by 47 basis points since the beginning of the last financial year. "Markets have factored in a 25 bps cut already. Commentary during the policy can result in volatility in bond yield movement, but the rupee is expected to be less volatile. This expected rate cut is largely priced in," Lakshmanan said.