RBI Monetary Policy: Analysts See Pause After Jumbo Rate Cut
Unless there are major economic surprises, the RBI will be on hold in August and beyond, according to Nomura.
The Monetary Policy Committee cut the repo rate by 50 basis points to 5.5%, changed stance to 'neutral' from 'accommodative', and cut the Cash Reserve Ratio by 100 basis points from 4% to 3% of NDTL.
After having reduced the repo rate by 100 basis points, monetary policy is left with limited space to support growth, RBI Governor Sanjay Malhotra said during his monetary policy speech. The MPC will carefully assess the incoming data and the evolving outlook to chart out the future course of monetary policy, he said.
The RBI is likely to assess the impact of 100-basis-point cuts announced so far, and speed of transmission, which will also be supported by a 100-bps reduction in CRR, before taking a call on its rate trajectory, said Sonal Badhan, economist at Bank of Baroda. "We believe that the terminal rate will remain at 5.5% for some time in the near-term as RBI is also cognizant of movement in real rates," she said.
Unless there are major economic surprises, the RBI will be on hold in August and beyond, according to Nomura. However, the policy outlook will depend on the macro outlook. "We see downside risks to the RBI’s GDP growth and CPI inflation outlooks," Nomura said. GDP growth is likely to surprise lower at 6.2%, while CPI inflation is tracking even lower at 3.3%, as per Nomura's estimates. While the RBI forecasts GDP growth in FY26 at 6.5%, it has revised the CPI inflation forecast to 3.7%.
"Therefore, we do not view today’s action as the end of the easing cycle," Nomura said, adding that they see the terminal repo rate at 5%, with a likely pause in August, followed by 25 basis points rate cut in each of October and December.
Suvodeep Rakshit, chief economist at Kotak Institutional Equities, also said that the decisions imply a pause in policy rates over next few policies, at least, a much more data dependent RBI responding only to shocks in global growth and domestic growth-inflation dynamics, and focus shifting completely to transmission of the rate cuts by banks.
The CRR cut, which the RBI estimates will infuse Rs 2.5 lakh crore of liquidity by December, could be offset by unwinding of RBI’s short positions in the FX forward book during the same period, Rakshit also said.
