RBI's Rate Cut: Boosting Growth Amid Low Inflation

The Reserve Bank of India's decision to cut the repo rate by 25 basis points is seen as timely and appropriate, considering low inflation and expected moderation in growth. Economists anticipate easing bond yields and stable GDP growth, with room for future monetary flexibility if global conditions worsen.

In a decisive move, the Reserve Bank of India (RBI) slashed its repo rate by 25 basis points during the Monetary Policy Committee meeting, a decision seen as apt in light of the prevailing low inflation and anticipated economic growth moderation. Rajani Sinha, CareEdge Group Chief Economist, hailed the timing of the adjustment, arguing it aligns with the statistical nature of current GDP growth.

Sinha noted the steep drop in inflation below the RBI's 2-6% target range and described India's robust GDP figures as influenced by past low base effects. She forecasts a slight deceleration in growth during the fiscal year's second half, predicting a shift from eight percent to roughly seven percent due to tariff effects and diminishing statistical boosts.

Despite this deceleration, Sinha anticipates no further policy easing in the upcoming year, projecting a solid seven percent GDP growth for FY27 with inflation potentially rising to around four percent. The RBI signaled its readiness to remain flexible, mindful of global trade uncertainties and geopolitical risks.

Bond yields are expected to decline following the rate reduction, with predictions set between 6.3 and 6.5 percent by fiscal year's end. The RBI's dovish stance could further influence yields toward the lower boundary. Such rate adjustments could galvanize credit demand, especially in retail loans, while industrial credit recovery is expected as private capital expenditure and large-industry lending show signs of improvement.

On currency matters, Sinha downplayed concerns over the rupee's recent depreciation, maintaining an end-of-year expectation of approximately 87 against the dollar. She cites the anticipated softening of the dollar, steady reserves, and a manageable current account deficit of around one percent of GDP as key factors. With limited fiscal room, monetary interventions play a crucial role in stimulating growth, according to Sinha.

Mirroring this sentiment, Ashok Gulati, former chairman of the Commission for Agricultural Costs & Prices, praised the rate cut as a vital step to maintain India's growth momentum above seven percent. He emphasized that lower inflation has opened up this opportunity, positioning India favorably even amidst President Trump's tariff challenges.

(With inputs from agencies.)