Will RBI Reduce Rates by 25 bps in Q4 CY25 Due to Benign Inflation?
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Synopsis
The expected rate cut by the RBI in Q4 CY25 could be a response to a mix of economic challenges, including declining export orders and government spending. With inflation projected to remain low, this move might provide much-needed relief to the economy.
Key Takeaways
- RBI may cut rates by 25 bps in Q4 CY25.
- Projected average inflation at 1.8%, below RBI's forecast.
- Gold prices are influencing core inflation significantly.
- Vegetable and fruit prices increased due to supply disruptions.
- Government spending growth may slow in 2HFY26.
Mumbai, Sep 15 (NationPress) - According to a report, the Reserve Bank of India (RBI) is anticipated to lower interest rates by 25 basis points in Q4 of CY25. This decision is largely attributed to expected weaknesses in growth stemming from reduced export orders and a slowdown in government expenditure.
HSBC Global Research highlighted that robust cereal production, well-stocked granaries, declining oil prices, and more affordable exports from China are likely to keep inflation subdued for an extended period.
The report estimates that average inflation for the current quarter will stand at 1.8%, which is below the RBI's forecast of 2.1%. It predicts that consumer price inflation for September will range between 1% and 1.5%.
Gold prices continue to significantly impact core inflation, with a 40% year-on-year increase contributing nearly 43 basis points to the consumer price index (CPI) in August, according to the report.
Furthermore, HSBC forecasts that recent GST rate reductions will ease the price growth of personal care products in the months ahead.
In August, vegetable and fruit prices surged due to supply disruptions caused by rainfall, while cereal and pulse prices continued to decline. The core inflation rate, which excludes food, fuel, housing, and gold, was recorded at 3.2% year-on-year, significantly below the RBI’s target.
However, the report cautions that excessive rainfall and flooding in north-west India, particularly in Punjab, pose ongoing risks.
Government spending, especially capital expenditure, which saw a 33% year-on-year increase from April to July, may begin to decelerate in the second half of FY26, aligning closer to the budgeted growth of 10%.
Earlier this month, HSBC adopted a 'neutral' stance on Indian equities, despite noting that five out of nine risk factors for the Indian markets are showing improvement.
While earnings growth is expected to taper to 8–9% in 2025, the consensus estimate for earnings growth stands at 11% for calendar year 2025, according to the brokerage.
Point of View
It's essential to recognize the RBI's potential rate cut as a strategic response to economic indicators. The interplay of low inflation and declining export orders suggests a proactive approach to maintain economic stability. Our commitment is to provide unbiased insights, ensuring that our audience remains well-informed.
NationPress
15/09/2025
Frequently Asked Questions
Why is the RBI expected to cut rates?
The RBI is likely to cut rates due to anticipated economic weaknesses from declining export orders and reduced government spending.
What is the projected inflation rate?
The projected average inflation rate for the current quarter is 1.8%, lower than the RBI's forecast of 2.1%.
How does gold impact inflation?
Gold prices, which have increased 40% year-on-year, are significantly affecting core inflation, contributing to the CPI.
What are the risks for the economy?
Excessive rainfall and flooding in regions like Punjab remain a significant concern for agricultural productivity and inflation.
What does the future hold for government spending?
Government capital expenditure growth is expected to slow in the second half of FY26, nearing the budgeted growth of 10%.
