In a surprise move, the Reserve Bank of India slashed policy rates beyond market expectations and shifted its policy stance from accommodative to neutral.
ING Group suggests the RBI’s current action indicates a likely pause in policy adjustments.
However, the possibility of future easing remains open, contingent on potential declines in either growth or inflation.
The Reserve Bank of India (RBI) has significantly lowered the repo rate by 50 basis points (bps) to 5.5%, exceeding market expectations.
The cut in interest rates brings the total repo rate reduction by the RBI in the current cycle to 100 bps, resulting in a real policy rate of 2.3%.
The RBI also reduced the cash reserve ratio by a massive 100 bps to 3%, the lowest since 2021.
“The RBI’s rate actions today hint at growing conviction within the Monetary Policy Committee that lower inflation is likely to persist, and that GDP growth remains on a weaker trajectory,” Deepali Bhargava, regional head of research, Asia-Pacific at ING Group, said in a note.
By front-loading rate cuts, the RBI seems keen to ensure the benefits of lower rates reach the economy and that there’s plenty of liquidity to keep things moving.
Not the end of rate cuts
The RBI surprised markets by changing its policy stance from ‘accommodative’ to ‘neutral’.
This shift was particularly unexpected as it occurred only two months after adopting an accommodative position, marking a significant reversal.
“That’s a pretty quick U-turn, and it suggests the central bank might be done with rate cuts for now,” Bhargava said.
Even though CPI inflation remains under the RBI’s target and the real policy rate exceeds the typical comfort level of roughly 1.5%, it paradoxically feels somewhat counterintuitive, according to Bhargava.
She said:
We continue to expect another 25bp rate cut by the RBI this year in the fourth quarter.
The RBI indicates a halt in policy adjustments but retains the option for further easing should economic growth or inflation decline.
It has revised down its consumer price index inflation prediction from 4.0% to 3.7% and maintained its GDP growth forecast at 6.5% for the fiscal year concluding in March 2026.
“Our own GDP growth estimates are slightly weaker than the RBI’s, and with real policy rates still sitting well above historical norms, we continue to expect one 25bp rate cut from the RBI later this year, likely in 4Q,” Bhargava said.
Impact on markets
A solitary interest rate cut today is unlikely to significantly affect the Indian Rupee (INR), according to ING.
This is likely a reaction to decreased inflation rather than an indication of growth worries.
ING anticipates fluctuating market conditions. However, the RBI’s focus on building foreign exchange reserves, a projected GDP growth slowdown due to tariffs and geopolitical issues, should support the currency and likely lead to an upward trajectory.
In the past year, the 10-year bond yield has seen a surge of over 100 basis points.
This increase can be attributed to a combination of factors: diminishing inflation rates and a favorable equilibrium between demand and supply.
“We still think the fundamentals support a further drop in yields, but the pace of decline is likely to be more gradual from here,” Bhargava said.
Given the ample liquidity within the system, the shorter end of the curve is expected to maintain strong support.
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