If you are a borrower, then 2025 has thus far turned out to be a good year, with interest rates finally starting to decline.
The Reserve Bank of India's Monetary Policy Committee (MPC) slashed its benchmark repo rate by 25 basis points in February to 6.25 per cent from 6.50 per cent, and followed it up with another 25 bps cut in April to 6.0 per cent, as boosting the economy amid global geopolitical and trade uncertainties gained currency, at a time inflation was cooling.
The question is, will we see a rate cut for the third consecutive time?
The MPC meets between June 4-6 and there are clearly things going in favour of the central bank staying on the lowering rate path.
Inflation—which had been a major worry through much of 2024, and a key reason RBI kept interest rates unchanged through 2024—has meaningfully fallen.
The CPI (consumer price index) inflation in April eased to 3.16 per cent, the lowest since July 2019: below the RBI's target of 4 per cent. At the same time, growth concerns linger.
Data released last week showed that while January-March quarter growth accelerated to 7.4 per cent, full year (2024-25) growth of 6.5 per cent was lowest in the past four years and is expected to remain around 6.0-6.5 per cent in the current financial year.
In this situation, another 25 basis points are expected to be cut, given the rate at which the RBI lends money to commercial banks.
"In this environment of easing inflation and heightened global uncertainties, we expect the MPC to maintain its focus on supporting the ongoing recovery in the growth momentum. The rate cutting cycle that began in February will likely continue, with a further 25-bps reduction in the repo rate expected at the June meeting, while retaining an accommodative stance," explained Rajani Sinha, chief economist at CareEdge Ratings.
Market consensus is strengthening around the likelihood of a third rate cut to help sustain India’s growth path, agree experts at Bajaj Broking.
"With inflation expectations anchored, growth momentum moderating, and external vulnerabilities persisting, the environment is becoming more favorable for another rate cut," they said.
They noted that while headline CPI inflation remains consistently below RBI's medium-term target of 4 per cent, GDP growth appears to be softening, worsened by external shocks.
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"The lowering interest rate differential between US and India and its impact on overseas investments (FPI flows) in India and the mid to long term trajectory of the inflation factoring in adverse base effect will weigh in MPC decisions as the policy rate goes further lower," opined Mandar Pitale, Head - Financial Markets at SBM Bank (India).
He expects the RBI will cut the repo rate by 25 bps this time, followed by another 25 bps rate cut in August, taking the rate to 5.5 per cent, and then pausing for a prolonged period.
Laukik Bagwe, Head of Fixed Income at ITI Mutual Fund also sees another 25 bps rate cut, with the repo rate eventually settling at 5.5 per cent this financial year. He expects the RBI will revise its CPI inflation projection for 2025-26 downwards to 3.80 per cent from 4.0 per cent.
