India cenbank may deliver third straight rate cut as inflation undershoots

The Reserve Bank of India (RBI) is widely expected to deliver a third consecutive rate cut of 25 basis points, bringing the repo rate to 5.75%, driven by muted inflation and a desire to boost economic growth; retail inflation has slowed to 3.16% in April, a near 6-year low. While the RBI expects inflation to average around 4% this year, many economists anticipate it will be lower, and the central bank is expected to maintain an accommodative stance while focusing on enhancing monetary transmission by keeping system liquidity in surplus.

Analysis

The Reserve Bank of India (RBI) is poised for a third consecutive monetary easing, with a strong consensus among economists (53 out of 61 polled by Reuters) anticipating a 25 basis point cut in the repo rate to 5.75%. This expectation is primarily driven by significantly muted retail inflation, which dropped to a near 6-year low of 3.16% in April, providing substantial room for the central bank to prioritize economic growth. While the RBI projects inflation to average around 4% for the fiscal year, many economists foresee it remaining lower. The Indian economy demonstrated robust performance with a 7.4% GDP surge in the March quarter, contributing to an estimated full-year growth of 6.5% for FY25, a pace the RBI hopes to maintain in FY26 despite headwinds from a global slowdown and U.S. tariff uncertainties. Barclays economists characterize the anticipated cut as an "opportunistic move" and expect the RBI to retain an "accommodative" stance. Supporting this view, IDFC First Bank's chief economist Gaura Sen Gupta noted that the neutral real rate is likely closer to 1.4% amidst softer global growth, with a low risk of economic overheating due to a persistent negative output gap. The RBI is also expected to continue its focus on enhancing monetary transmission by maintaining surplus system liquidity, having already infused nearly $100 billion into the banking system since January. Further measures, such as widening the policy rate corridor between the repo and Standing Deposit Facility (SDF) rate, and potential adjustments to liquidity management operations or cash reserve requirements, are also under consideration, as indicated by falling treasury bill yields and requests from lenders. The overall strongly positive sentiment (0.7) and significant market impact score (0.75) associated with this news suggest a favorable market anticipation of these policy actions.

Key Decisions for Investors

• Consider overweight positions in Indian fixed income, as further rate cuts and an accommodative stance are likely to support bond prices.
• Evaluate opportunities in rate-sensitive equity sectors such as banking, real estate, and automotive, which typically benefit from lower interest rates and improved liquidity, while monitoring the effectiveness of monetary transmission.
• Closely monitor upcoming inflation prints and RBI commentary, as deviations from the current disinflationary trend could alter the central bank's policy trajectory and impact asset valuations.
• Factor in external risks, including global economic slowdown and trade policy uncertainties, which could temper the positive impact of domestic monetary easing on the Indian market.