Union Bank of India Projects Lower Inflation Amid Cautious Growth Outlook

Union Bank of India predicts lower inflation for FY25 and FY26, challenging the Monetary Policy Committee's forecasts. While cautioning against optimistic growth projections, it anticipates a shallow rate cut cycle. The Reserve Bank of India is expected to consider further rate cuts amid global uncertainties and economic volatility.

The Union Bank of India has projected that inflation for fiscal year 2025 could potentially fall below the Monetary Policy Committee's revised forecast of 4.4 percent, with fourth-quarter Consumer Price Index (CPI) inflation likely tracking at 4 percent. Looking ahead to fiscal year 2026, the bank anticipates inflation at 4.0 percent, slightly beneath the MPC's estimate of 4.2 percent. The bank has also expressed concerns regarding downside risks to India's growth and inflation projections in the forthcoming years.

In its assessment, the Union Bank of India indicated that the Monetary Policy Committee revised the fiscal year 2025 growth projection to 6.4 percent from an earlier 6.6 percent, although a recovery to 6.7 percent is projected for fiscal year 2026. The bank expressed skepticism over the 6.4 percent growth forecast for fiscal year 2025, as it relies on a December 2024 quarter growth exceeding 6.5 percent, while current tracking is closer to 6 percent. However, the bank remains confident in a 6.5 percent growth projection for fiscal year 2026, despite considering a 7 percent growth in the second quarter of fiscal year 2026 as overly optimistic given the global economic conditions.

The bank continues to maintain its fiscal year 2026 growth estimate at 6.5 percent, exercising caution towards the MPC's optimistic 7 percent growth outlook for the second quarter of fiscal year 2026 amidst global economic challenges. Additionally, it foresees a shallow rate cut cycle, forecasting a total reduction of 50 basis points, with 25 basis points already implemented. Amid ongoing global uncertainty, the bank expects the Reserve Bank of India to evaluate further rate cuts around April. The CPI forecast for fiscal year 2026 by the MPC stands at 4.2 percent, suggesting that the repo rate may stabilize at 6 percent while closely monitoring inflation risks.

The RBI-led MPC unanimously decided to lower the policy repo rate by 25 basis points to 6.25 percent, marking the first rate cut in five years. Yet, it maintains a neutral stance to retain policy flexibility amidst global financial volatility, trade uncertainties, and potential climate-related disruptions. The committee highlighted that while growth is projected to rebound from the lows of the second quarter of fiscal year 2025, it remains below the previous year's levels. Inflation is expected to further moderate in fiscal year 2026, aligning with the 4 percent target, spurred by favorable food inflation projections and the transmission of past monetary policy actions.