Could the RBI Lower Repo Rate If GDP Declines?
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Synopsis
As India's GDP growth hangs in the balance, can the RBI's Monetary Policy Committee take decisive action on the repo rate? With potential global influences and internal economic factors at play, the upcoming decisions will be crucial for India's economic trajectory.
Key Takeaways
- The RBI may consider rate cuts based on GDP performance.
- Current repo rate stands at 5.50 percent.
- GDP growth forecast for FY26 is 6.5 percent.
- US Federal Reserve's actions could influence RBI's decisions.
- Corporate bonds are offering favorable spreads currently.
New Delhi, Aug 14 (NationPress) The Reserve Bank of India's Monetary Policy Committee (MPC) may contemplate further reductions in the policy rate if forthcoming GDP figures do not meet expectations and if the US Federal Reserve initiates aggressive easing due to a weakening labor market, according to a report published on Thursday.
HSBC Mutual Fund indicated that any additional leeway for easing could arise if economic growth lags, alongside potential rate cuts from the US Federal Reserve aimed at addressing labor market vulnerabilities.
In its recent policy meeting, the MPC held the GDP growth forecast for FY26 steady at 6.5 percent, with quarterly estimates of 6.5 percent in Q1, 6.7 percent in Q2, 6.6 percent in Q3, and 6.3 percent in Q4.
The report suggests that until these conditions manifest, yields on government securities are likely to remain stable, primarily driven by liquidity factors.
The RBI's committee maintained the repo rate at 5.50 percent while adopting a neutral stance following previous cuts totaling 100 basis points.
The report elaborates that the RBI aims to allow time for the effects of recent rate cuts to materialize, acknowledging global uncertainties and tariff-related risks that may impact growth, though their influence on inflation is expected to remain limited.
The RBI is anticipated to sustain ample system liquidity to ensure that the benefits of prior rate cuts are fully realized, with an anticipated cash reserve ratio reduction next month likely to further decrease borrowing costs, as stated in the report.
Additionally, the report noted that corporate bonds with maturities of 2–4 years are presently providing attractive spreads of 65–75 basis points over comparable Indian government bonds, which may experience spread compression in the near future.
As the easing cycle approaches its conclusion, the report recommends an overweight position on these bonds to seize carry opportunities.
A possible rate cut from the US Federal Reserve in September could provide the RBI with greater flexibility, especially with inflation expected to remain moderate until Q4 of FY26, according to the report.
It anticipates the MPC to adopt a measured approach as the end of calendar year 2025 approaches, with a continued focus on India's growth trajectory.
Point of View
It is crucial to recognize the implications of potential RBI rate cuts on India's economy. With global trends and local growth projections at the forefront, the committee's decisions will be instrumental in navigating the challenges ahead while ensuring stability in the financial landscape.
NationPress
07/10/2025
Frequently Asked Questions
What is the current repo rate set by the RBI?
The current repo rate set by the RBI is 5.50 percent.
What GDP growth rate has the MPC forecasted for FY26?
The MPC has forecasted a GDP growth rate of 6.5 percent for FY26.
How might US Federal Reserve actions impact the RBI?
If the US Federal Reserve initiates aggressive easing, it could provide the RBI with more room to lower its rates.
What factors could lead to a repo rate cut in India?
A decline in GDP data and a weaker labor market in the US could prompt the RBI to consider rate cuts.
What is the expected impact of a cash reserve ratio cut?
A cash reserve ratio cut is expected to further ease borrowing costs in the economy.
