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RBI signals pause after December cut as inflation pressures edge up
Eleven of 14 economists polled by ET expect no further reduction in the policy rate in the coming months.
Proposed trade deals with the USA, the European Union and others have increased growth prospects, thus reducing pressure on the central bank to lower rates to push growth, economists said.
The Monetary Policy Committee (MPC) of the RBI on Friday kept the policy rate unchanged at 5.25% after lowering it 125 basis points in the last one year.
“The upward revision of inflation and GDP growth forecast gives a hawkish tilt to the policy and indicates monetary policy easing is largely behind us,” said Amit Somani, deputy head of fixed income at Tata Asset Management.
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in play With GDP base years under revision, economists exepect a prolonged pause rather than renewed easing cycle
Among the 11 economists Within who expect 5.25% as the terminal rate, six said the RBI is likely to remain guided by evolving growth-inflation dynamics. With GDP base years under revision, the true momentum of economic growth remains uncertain, reinforcing expectations of a prolonged pause rather than a renewed easing cycle, they said.
Noting the momentum in private consumption, steady rural demand and improving agriculture activity, the central bank increased the GDP growth projections for the first and second quarters of FY27 by 20 basis points each to 6.9% and 7%, respectively. Inflation projection was also revised higher for FY26 to 2.1% from 2%. For the ongoing quarter, CPI is now projected at 3.2%, up from 2.9%.
“While uncertainty remains on the growth-inflation figures as we await the new series, the uptick in commodity prices and weaker currency may pose upside risks to inflation,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
A small minority, however, still expects one final rate cut, arguing that growth could slow once the new GDP base year is factored in. Elevated geopolitical uncertainty also risks weighing on economic activity. This leaves room for limited additional easing, taking the repo rate to 5%.
“The MPC meeting came against a backdrop of heightened geopolitical uncertainty, inflation below the lower end of the MPC tolerance band, and volatile currency markets,” said Sachin Bajaj, chief investment officer at Axis Max Life Insurance.
“We anticipate a final 25 basis point cut in the repo rate to 5% during the early part of the next financial year to address growth concerns emanating from the uncertain global environment,” he said.
Nomura, too, expects one more cut as “we await the implications of the new CPI and GDP series.” The brokerage has assigned a 65% probability to its baseline.