The Reserve Bank of India (RBI) is likely to reduce the repo rate by 25 basis points (bps) in its upcoming policy review meeting scheduled for April 7-9, 2025, as projected by India Ratings and Research (Ind-Ra). This rate cut is expected to be the first of a total 75 bps reduction anticipated in FY26. The forecast comes amid cooling inflation, with headline inflation in FY25 projected to drop to 4.7%. However, Ind-Ra cautions that if the impact of US reciprocal tariffs turns out to be higher than expected, further rate cuts may be warranted by the RBI to maintain economic stability.

The Monetary Policy Committee (MPC) of the RBI increased the repo rate by 250 bps between May 2022 and February 2023, bringing it to 6.5% to curb rising inflation. The rate was later cut by 25 bps in February 2025, lowering it to 6.25%. According to Ind-Ra, the March quarter of FY25 may witness headline retail inflation falling below 4% for the first time in 21 quarters, indicating a favorable trend for rate cuts.

Expected Rate Cuts in FY26

Ind-Ra anticipates a maximum of three rate cuts in FY26, totaling 75 bps, which would bring the terminal repo rate down to 5.5% by the end of the fiscal year. The agency projects that average inflation during FY26 will hover around 4%, maintaining a real repo rate of approximately 1.5%. This real repo rate, which accounts for inflation-adjusted returns, is considered conducive to supporting economic growth while keeping inflation under control.

Focus on Growth and Inflation Balance

The minutes of the February 2025 MPC meeting suggest that the RBI is increasingly concerned about slowing growth momentum. While low and stable inflation remains the primary objective of the RBI, supporting economic growth through appropriate monetary policy measures is expected to become a significant focus area in FY26. By easing the repo rate, the RBI aims to provide a boost to the economy by making credit cheaper and stimulating demand.

Potential Risks and External Factors

While the RBI's decision to lower the repo rate is primarily driven by domestic inflation trends and growth concerns, external factors such as the impact of US reciprocal tariffs could influence the trajectory of monetary policy. If these tariffs lead to a sharper-than-expected rise in imported inflation, the RBI may reconsider its rate cut trajectory or opt for a more cautious approach.

Historical Context of Repo Rate Changes

Between May 2022 and February 2023, the RBI undertook an aggressive rate-hiking cycle that raised the repo rate by 250 bps to contain soaring inflation. This cycle brought the rate to 6.5%, the highest in recent years. The February 2025 cut of 25 bps marked the first sign of easing, indicating that inflationary pressures were easing and growth support was becoming a priority.

MPC's Forward Guidance and Economic Outlook

The MPC's forward guidance suggests that future rate decisions will be guided by a careful evaluation of inflation trends, growth prospects, and global economic conditions. The RBI is expected to maintain a data-driven approach, with flexibility to adjust the policy stance if external risks materialize. Ind-Ra’s forecast of three rate cuts aggregating to 75 bps in FY26 aligns with the RBI’s objective of maintaining price stability while fostering economic growth.

Implications for Borrowers and Businesses

A reduction in the repo rate translates to lower borrowing costs for businesses and consumers. Home loan and auto loan borrowers could benefit from lower EMIs, while corporate borrowers may see a reduction in their cost of capital. Lower rates also boost consumer spending and investment activity, leading to a positive impact on overall economic growth.

Conclusion

The anticipated repo rate cut of 25 bps in April 2025 and a total of 75 bps in FY26, as projected by India Ratings and Research (Ind-Ra), reflects a shift in the RBI’s policy stance towards supporting growth while maintaining inflation control. With headline inflation cooling to 4.7% in FY25 and further expected declines, the RBI is well-positioned to adopt a pro-growth policy stance. As the MPC navigates external risks and domestic economic conditions, the forthcoming rate cuts could play a pivotal role in reviving growth momentum and enhancing India’s macroeconomic stability in FY26.

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