Reserve Bank of India May Cut Interest Rates
The Reserve Bank of India (RBI) is likely to announce a rate cut of 25 to 50 basis points in the coming months. This decision is based on the fact that inflation continues to ease, supported by benign food prices and the impact of recent GST cuts.
Reasons for the Rate Cut
The main reason for the potential rate cut is the softening inflation, led by lower food prices and the GST rate cuts. This provides room for additional monetary easing to support economic growth, despite external headwinds from tariffs and trade-related challenges. According to a report by Kotak Securities, "Given benign food prices and GST cuts-led softening inflation amid external headwinds from tariff and trade-related issues, we continue to see scope for additional rate cuts of 25-50 bps to support growth."
Impact of GST Cuts
The GST rate cuts have started showing partial passthrough in select items of the CPI basket. The October reading is likely to capture the remainder of the transient impact. This means that the effect of the GST cuts will be fully reflected in the inflation rate soon.
RBI’s Policy Approach
The RBI remains focused on the full transmission of past policy actions while being cautious about possible upside risks to inflation in FY27. In its October policy review, the RBI’s Monetary Policy Committee (MPC) unanimously decided to keep the policy repo rate unchanged at 5.5 per cent, maintaining a ‘neutral’ stance. The Marginal Standing Facility (MSF) rate and Standing Deposit Facility (SDF) rate were also left unchanged at 5.75 per cent and 5.25 per cent, respectively.
Inflation Forecasts
The report revised its inflation forecasts slightly higher, now estimating FY26 inflation at 2.1 per cent and FY27 inflation at 4.1 per cent. The consumer price index (CPI) inflation moderated to 1.5 per cent in September due to a contraction in food prices, while core inflation rose to 4.5 per cent because of a sharp uptrend in bullion prices.
Conclusion
In conclusion, the RBI’s policy approach in the coming months will balance the need to sustain growth while keeping inflation expectations anchored. The potential rate cut of 25 to 50 basis points will support economic growth, and the timing and quantum of any potential rate cut will be a key decision for the central bank to ensure maximum impact from further monetary easing. The RBI will continue to monitor the inflation rate and adjust its policy accordingly to achieve a balance between growth and inflation control.
