'Rate cut looks unlikely and there is reason to believe that the cycle is over.'
Mixed views were expressed by top economists on the possible changes in the repo rate at this week's meeting of the Reserve Bank of India's Monetary Policy Committee (MPC).
At its last meeting the MPC hit the pause button and retained the repo rate at 5.5%.
Those who expect the MPC to recommend a rate cut cite the inflation rate being low as the main reason.
The repo rate is the rate at which the RBI lends to the banks.
Terming the MPC's decision to be a "close call" Madhavi Arora, Chief Economist, Emkay Global Financial Services, told this correspondent: "Another sharp inflation undershoot is difficult to ignore for the MPC. FY26E inflation is now tracking less than 2%, implying risk of a further undershoot of about 50-60 basis points (bps) to the RBI's FY26 inflation forecast (2.6%), which could support the case for a December rate cut (and beyond, depending on how tariff effects evolve). FY27E is at 4.1% vs RBI's 4.5%."
Given the repeated undershoots versus the RBI's inflation forecasts, the policy focus on one-year-ahead inflation forecast (RBI: 4% plus) looks increasingly misplaced in a fast-changing environment, Arora added.
"We expect the RBI to announce a 25 bps rate cut, supported by benign headline inflation. Food prices are likely to remain in deflation, keeping overall inflation comfortably below target through the end of the fiscal year, aided further by the pass-through of GST rate cuts," said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Group.
"Although India is projected to grow at 7% in FY26, this remains below the economy's estimated potential," Hajra added.
According to Hajra, the deflation in food prices is expected to be temporary, and the core inflation -- excluding the impact of gold -- is running below the 4% target.
The combination of these two factors provides the MPC with room not only to cut rates by 25 bps in the upcoming monetary policy but also be more accommodative in terms of liquidity stance to strengthen the transmission of policy easing.
But the pressures due to a widening goods trade deficit and continued foreign portfolio investments (FPI) outflows have weighed on the rupee, presenting a counterpoint to immediate monetary easing, Hajra said
"Nonetheless, the RBI retains multiple tools beyond the policy rate to manage external balances and currency stability, even as it guides monetary conditions toward greater accommodation," Hajra remarked.
"On one side," Kruti Chheta, Fund Manager and Fixed Income Analyst, Mirae Asset Investment Managers (India), said, "GST rationalisation and India-US talks could support growth without immediate monetary policy easing. On the other, benign inflation, regional deflationary spill overs and nominal GDP trailing expectations shift focus toward supporting demand. Commentary from RBI will be key to understand the central bank's stance."
Pointing out the RBI-MPC may not cut the repo rate this time again Madan Sabnavis, Chief Economist, Bank of Baroda said: "First growth is accelerating and on the right path. Second inflation through low today because of the base effect is likely to increase to beyond 4% by end of the year."
"Therefore rate cut looks unlikely and there is reason to believe that the cycle is over."
Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com
Feature Presentation: Aslam Hunani/Rediff
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