Introduction to India’s Economic Outlook
The Reserve Bank of India (RBI) is considering cutting interest rates by 25 basis points in the fourth quarter of this year. This decision is based on high-frequency data that has shown strong performance since June. According to a report by HSBC Global Investment Research, the RBI may lower its growth forecast and cut rates if the current trend continues.
Current Economic Situation
The RBI maintained the policy rate at 5.50 per cent in its August meeting, after a significant easing in the previous session. Inflation stood at 1.6 percent year-on-year, which is an eight-year low. Food prices rose gradually, while energy prices fell and core inflation moderated. The sequential momentum slowed to 0.1 per cent, with the average sequential momentum over the past six months remaining stable.
Inflation Forecast
CPI inflation is expected to average 3.2 per cent in FY26, driven by favourable base effects, well-stocked food stocks, healthy Kharif crop sowing, and weak commodity prices. Vegetable prices, which had been at inflation levels for the past six months, rose faster than expected. Excluding vegetables, core inflation declined to 3.6 per cent from 3.8 per cent earlier.
Food and Energy Prices
Food prices recovered from deflation after six months, rising by 0.2 per cent. Heavy cereals, with a weightage of 9.7 per cent, continued to contract for the second consecutive month. Falling prices of pulses, sugar, and fruits partially offset the rise in prices of edible oil, eggs, meat, fish, and vegetables. The energy index fell sharply, falling 0.7 per cent on a seasonally adjusted monthly basis, due to the reduction in electricity and LPG prices.
Expected Rate Cut
If high-frequency activity indicators stay weak in the coming months, the RBI is likely to lower its growth forecast. A 25 bps repo rate cut is expected in Q4, bringing the repo rate to 5.25 per cent. This rate cut will depend on the performance of high-frequency data in the coming months.
Conclusion
In conclusion, the RBI may cut interest rates by 25 basis points in the fourth quarter of this year, depending on the performance of high-frequency data. The current economic situation, with low inflation and stable sequential momentum, supports this decision. The expected rate cut will bring the repo rate to 5.25 per cent, which could have a positive impact on the economy. However, the final decision will depend on the RBI’s growth forecast and the performance of the economy in the coming months.
