(HT)
As India enters a new fiscal year marked by evolving global complexities and domestic resilience, the monetary policy focus is likely to continue towards supporting growth, without compromising price stability.
The Reserve Bank of India (RBI) is expected to deliver another 25 basis points (bps) repo rate cut in its June 6 policy meeting, bringing the rate down to 5.75% and marking the third consecutive cut since February 2025, signalling a proactive approach to easing financial conditions with the objective of stimulating credit and investment, while ensuring a durable alignment of the 4% CPI target.
The policy stance turned accommodative in April and is likely to continue as RBI balances near-term cyclical risks with a forward-looking view on India’s growth prospects.
The central bank will likely maintain its FY26 growth forecast of 6.5%, while possibly lowering its CPI inflation forecast to 3.8%, from 4.0% earlier. In the April policy, RBI revised both the growth and inflation forecasts lower by 20bps to 6.5% and 4.0%, respectively.
The policy coordination between the government and RBI remains the strongest at this juncture, with fiscal and monetary authorities showing strong resolve to do “whatever it takes” to prevent India’s growth from slipping below its potential. In addition, various supply-side reforms initiated over the past 10 years also demonstrated India’s potential to remain the fastest-growing major economy for years to come.
This will likely lead to increased global investments in India to take advantage of the economies of scale and to cater to its large domestic market. In this backdrop, it will not be entirely surprising if India emerges as a net beneficiary once the dust settles down eventually on the tariff arithmetic.
The early onset of the monsoon has already led to a 10-25% rise in key vegetable prices, including tomatoes and leafy greens. Despite a projected 2.3% month-on-month increase in food prices during June and July, headline CPI inflation is expected to remain around 3.1-3.2% year-on-year due to a favourable base effect.
However, a sharper spike, similar to July 2023’s 214% surge in tomato prices, could temporarily push inflation to 4.1-4.2%. This is expected to normalise by September, suggesting inflation spikes to be short-lived and unlikely to affect the full-year outlook. Nonetheless, such volatility may prompt RBI to pause in its August review.
Adding to the monetary backdrop, RBI’s ₹2.7 lakh crore dividend transfer to the government will significantly enhance fiscal headroom, as the FY26 Union Budget had factored in ₹2.3-2.4 lakh crore in non-tax revenue from RBI dividend.
The transfer is set to push durable liquidity into deeper surplus territory—estimated to exceed ₹5 trillion, or nearly 2.5% of Net Demand and Time Liabilities (NDTL)—bringing short-term money market rates closer to the Standing Deposit Facility (SDF) rate, which is 25bps below the repo rate.
Combined with a 25bps rate cut, easing liquidity will result in an “effective easing” of 50bps in June.
This is already reflected in the overnight call money rate, which is currently trading 15bps below the current 6.00% repo rate.
(Kaushik Das, is chief economist – India, Malaysia, and South Asia, Deutsche Bank AG)
