The Reserve Bank of India’s monetary policy committee on Friday, slashed the benchmark repo rate by another 25 basis points to 5.25 per cent and also announced liquidity injection measures, which together should boost the lower interest rate transmission in the system, experts say. More over, with inflation expected to remain benign for some time, and growth likely to see some slowdown amid continued external pressures, there is also a view that the MPC may have left the room for at least one more rate cut, should the need arise.
Ahead of the MPC meeting this week, the key question was whether there would be another interest rate cut. Some had felt, with inflation extremely low, RBI had a chance to cut rates. Others felt, with GDP growth strong, there was no urgency. The MPC would also perhaps look at the depreciating rupee, before cutting rates, others argued. Eventually, the RBI used the disinflationary window to give growth an impetus.
According to RBI data, the weighted average lending rate of outstanding rupee loans has moderated 63 bps so far. On the deposit side, the weighted average domestic term deposit rate on fresh deposits has declined by 105 bps, while that on outstanding deposits has softened by 32 bps over the same period.
Speaking with reporters in the post-policy conference, RBI Governor Sanjay Malhotra didn’t provide any specific outlook on whether there would be more rate cuts ahead, but said the focus perhaps should now be on the monetary transmission.
To that effect, the RBI has announced open market operation (OMO) purchases of government securities amounting to Rs 1 lakh crore and 3-year US dollar-rupee buy sell swaps of USD 5 billion this month, and this liquidity injection experts say should boost interest rate transmission further.
Some believe, the MPC cut the repo rate one more time, should growth conditions warrant.
“The MPC’s decision was assertive – the committee delivered on both rate cuts and liquidity support. The governor noted disinflationary pressures in the economy, which created room for a rate cut despite ongoing trade uncertainties and early signs of weakness in indicators such as the IIP and electricity demand. We anticipate an additional 25 bps rate cut in February, based on our forecast of further downside surprises in inflation over the next 2-3 months,” said Radhika Piplani, chief economist at Motilal Oswal Group.
Shriram Ramnathan, CIO, Fixed Income, HSBC Mutual Fund echoed similar views.
“The RBI MPC has effectively juggled the growth, inflation, currency mix with a 25 bps cut along with clear enunciation of durable liquidity provision over the coming quarters. Albeit data dependent, we believe the growth-inflation outlook continues to provide space for one more cut in the first quarter of 2026,” he said.
Aurodeep Nandi, India economist at Nomura, pointed out that the announcements on durable liquidity injections alongside the rate cut suggests a “penchant towards wholeheartedly reinforcing policy transmission.”
By revising the inflation forecast downward, the MPC has given it space to cut policy rates, pointed D.K. Joshi, chief economist at Crisil. Furthermore, it expects GDP growth to moderate in the second half, some signs of which are already visible in recent high frequency indicators, he added.
“Headwinds to growth are likely from high US tariffs and moderation in government capex. We foresee limited demand pressures on inflation, which will keep policy space for rate cuts if growth surprises on the downside,” added Joshi.
HSBC’s chief India economist Pranjul Bhandari says growth, while strong now, is expected to soften by March due to fiscal tightening, weaker exports and the GST boost fading. With fiscal policy likely to remain tight looking ahead, the onus for supporting growth will be on the RBI, she felt.
“Even though the RBI has lowered first half FY2027 inflation forecast by 50 bps (4.5 per cent previously to 4 per cent now), our forecasts are 50 bps lower (3.5 per cent). If we are correct and RBI eventually makes further downward adjustment to inflation, there would be space to ease further, if growth requires it,” said Bhandari.
Indranil Pan, chief economist at Yes Bank says the RBI will remain data driven on the road ahead. While he broadly thinks that the RBI is done with its rate cut cycle, any further easing of monetary policy will depend on how growth dimensions pan out.
“With RBI continuing to leave room open for further easing, we do not rule out another 25 bps cut with the likely terminal rate at 5 per cent followed by a prolonged pause,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.