RBI Monetary Policy: Despite 'Hawkish' Policy, Economists See Shallow Rate Cut Cycle From December

India's Monetary Policy Committee kept the benchmark repo rate unchanged for the ninth straight meeting, along with a status quo on the stance. It continued to remain cautious on inflation amid elevated food inflation.

Despite 'hawkish' tone on inflation, economists expect a change of stance in October, followed by the first rate cut in December.

Rains have gone from deficit to surplus over the last fortnight, and temperatures have cooled, said Pranjul Bhandari, chief economist at HSBC. If this continues, food inflation could fall quickly from October onwards, opening up the space for monetary policy easing, she said.

"We expect two RBI rate cuts of 25 basis points each in the current cycle, one in Q42024 and the other in Q12025, taking the repo rate to 6%. Given that growth is strong, we believe there will be an easing cycle, but a shallow one."

This is also in line with the RBI's updated real neutral rate target range of 1.4–1.9%, she said. A middle-of-range neutral rate (of 1.65%) combined with the RBI's one-year inflation forecast of 4.4% gives a terminal repo rate of about 6%, she said.

We will look for a stance change in the October policy, followed by a rate cut in December, said Suyash Choudhary, head of fixed income at Bandhan AMC. "That said, a change in stance doesn’t need to necessarily precede the actual first cut."

"We are not looking for more than 75 bps cuts in this cycle, unless the Western world heads towards a more severe than currently expected landing," he said. However, Indian bonds appear to have a favourable demand-supply environment, especially for government bonds, over the next few years. The current juncture is particularly noteworthy since it reflects the confluence of bullish cyclical factors with the more enduring structural story, he said.

Along with domestic factors, the RBI’s policy will be shaped by global factors as it faces an asynchronous global monetary policy cycle, uncertain global demand conditions and FX volatility, said Suvodeep Rakshit, senior economist at Kotak Institutional Equities. The domestic growth-inflation mix will provide space to hold the repo rate.

"We maintain our call of a shallow rate cut cycle (75–100 bps) starting in December, given that H2FY26 inflation is likely to glide towards 4% and likely weakening in global growth conditions in 2HFY25." The stance change could be either in the October policy or along with rate action. If global and domestic growth metrics remain robust, the RBI could defer rate cuts to FY26, especially if inflation remains sticky, Rakshit said.