Key Highlights
- RBI likely to reduce repo rate by 25 bps on June 6 amid slowing growth.
- Another 25 bps cut anticipated in August, responding to subdued inflation and economic challenges.
The Reserve Bank of India will cut interest rates for the third time in a row on June 6 and again in August to support a weak economy, according to a Reuters poll of economists, whose forecasts remained largely unchanged from the previous survey.
With economic growth falling sharply to 6.3% last fiscal year from over 9% the year before and inflation remaining below the RBI's 4.0 percent target, the RBI has plenty of room to cut rates. Other major central banks were expected to ease policy further in response to rising global tensions sparked by US President Donald Trump's trade war.
A strong majority of economists (53 of 61) in a May 19-28 Reuters poll expected the RBI to cut the repo rate to 5.75 percent at the end of its June 4-6 meeting. Two respondents predicted a 50-basis-point cut, while the remaining six expected no change.
More than 80% of economists (47 of 58) expect the key rate to end August at 5.50 percent. This was an increase from a survey conducted last month, when just over half held that view.
"The global risks we face in terms of trade tensions are downside risks to global growth and, thus, to India's growth," said Dhiraj Nim, economist at ANZ and one of the few looking for two more cuts after an expected June 6 reduction.
If domestic inflation is not an issue, these risks should prompt the RBI to strengthen its counter-cyclical policy response.
If a trade agreement with the United States fails to materialize, interest rates could fall even further than economists currently anticipate.
Also Read: RBI MPC Cuts Repo Rate for the First Time in 2 Years, by 25 Basis Points to 6.25%
For now, the shortest and shallowest rate-cutting cycle in over ten years would be a 100 basis point total easing. In the meantime, a separate Reuters poll predicts that the Indian stock market will hit a new high by the end of 2025, despite worries about its exorbitant valuations.
This indicates a comparatively upbeat assessment of the economy. The poll predicts that GDP growth will average 6.3% this fiscal year and 6.5% the following year.
Yes Bank chief economist Indranil Pan claims that because of limited liquidity, banks were unable to significantly lower lending rates in response to the rate cut in February.
Still, bank deposit rates have fallen, but it is unclear whether this reflects actual policy transmission or signs of stress in the banking system, he said.
