- The Reserve Bank of India surprised the markets and ourselves by delivering a larger than expected 50bps repo rate cut in its June policy meeting, compared with our forecast for a 25bps cut.
- This was also coupled with a 100bps reduction in the Cash Reserve Requirement to 3%, to be delivered in four tranches starting 6 Sep 2025, and which is estimated to add around INR2.5trn in liquidity to the banking system.
- The most important takeaway from the RBI meeting is that this is a front-loading of rate cuts, rather than a re-assessment of a lower terminal rate, with lower inflation giving RBI policy space to bring forward the cuts.
- As such, we do not think we should necessarily price in more rate cuts just because of today’s move, even as we think RBI retains a dovish bias.
- We keep our forecast for RBI to deliver another rate cut in 4Q2025 (calendar year), bringing the repo rate to 5.25% by December 2025, and we are implicitly forecasting a shift in timing rather than a more dovish rate profile. The next leg of the rate move will likely have to come from a downside inflation surprise, and this is effectively what we are forecasting with our expectation for inflation to average 3.4% in FY2025/26 (vs RBI’s forecast of 3.7%).
- We keep our USD/INR forecast at 84.50 by 3Q2025 (CY) and 83.50 by 1Q2026 (CY) (see INR – Art of the Deal). If our assessment is correct, today’s policy decision unlikely changes the fundamentals for FX we laid out earlier.
Details:
- There are several key reasons why we think today’s policy move was a front-loading of rate cuts, with the RBI likely on pause for now and the next cut only to come later in 4Q2025.
- For one, the RBI shifted its policy stance to neutral from accommodative, indicating a more balanced path of risk moving forward.
- Second and on a similar note, the RBI also mentioned that monetary policy is left with very limited space to support growth, after having reduced the policy repo rate by 100bps in quick succession.
- Third, while 5 members of RBI’s Monetary Policy Committee voted for a 50bps rate cut, one external member dissented and voted for a 25bps rate cut (Shri Saugata Bhattacharya).
- We think there are at least two ways to interpret the combination of these messages from RBI, both of which are not mutually exclusive. First, it may signal some concern within the RBI MPC around the signalling effect of a jumbo 50bps rate cut, and to assuage these concerns, RBI Governor Sanjay Malhotra perhaps had to develop a consensus within the MPC on the right communication strategy. Second, it may perhaps also signal RBI’s desire to deliver an insurance cut against external risks such as the impact of tariffs, while not taking an eye off risks to inflation such as the upcoming monsoon.
- The RBI also lowered its FY2025/26 inflation forecast to 3.7% from 4.0%, while keeping its GDP growth forecast at 6.5%.
