India-Economics : Dovish RBI ramping up accommodative bias by Elara Capital
Key takeaways: Amid the backdrop of softer growth and lower inflation, the RBI’s MPC cut the policy repo rate by 25bp to 6.0%, in line with our expectations. The policy stance was changed to accommodative, and the Governor struck a dovish tone, confirming ramp-up in accommodative bias in the upcoming meetings. We see the first leg of impact of global tariff tantrum to be in the form of growth risks both in India as well as the world and potentially softer inflation as demand, we expect the MPC to cut the policy repo rate by another 75bp in FY26E to overall 100bp vs 50-75bp earlier.
Growth outlook clouded by global uncertainty: The RBI pared down FY26 growth projection by 20bp from 6.7% to 6.5% vs our estimates of 6.5% with a 30-40bp impact due to tariff-related ambiguity, citing global uncertainty. The RBI is of the view that increasing trade frictions will impede global growth as implications of tariff hikes remain uncertain. On the domestic front, according to the RBI, growth impulses remain supported by the resilient services sector, bright prospects from rural demand amid a normal Monsoon & softer inflation, and the Central government capex aiding in investment activity. In our view, the biggest positive for India is the change in the domestic policy backdrop where two key agents of the economy – the RBI and the government -have turned growth supportive (for more, please refer to our note, India: economic policy backdrop is turning, released on 20 March 2025). Although the RBI sounded positive on domestic manufacturing activity, we believe global supply chain dislocation and trade hurdles can pose challenges for the manufacturing sector in FY26.
Ebbing inflation risks: The RBI revised down inflation projection to 4.0% (vs our estimates of 4.5%) for FY26 vs 4.2% in the February 2025 meet. According to the Central Bank, the outlook for durable softening in food inflation has increased, underpinned by robust Kharif arrivals, record wheat production estimates, and higher key pulses production. Adding comfort on the food inflation part, global crude oil prices have softened ~19% CYTD to trade in the range of USD 60-61/bbl. For inflation, while higher tariffs can increase the spill-over impact on supply chains leading to higher inflation, it does not qualify as an immediate risk. Global commodity price correction has increased our bias toward lower inflation. We see a 20-25bp downside bias to our FY26E projection of 4.5%. In terms of risks, we remain watchful of the weather conditions, especially with higher-than-average temperatures adding to food price pressures.
See cumulative 100bp cut in FY26E vs 50-75bp previously: The tone of the Monetary Policy as well as the Governor’s statement was dovish, indicating preparedness for an aggressive rate cut cycle complemented by comfortable systemic banking liquidity. We see that a window of opportunity has emerged for the RBI (and other Asian EMs too) to increase its accommodative bias in the backdrop of tariff uncertainty and support growth. This window comprises a softer US dollar (DXY Index) and short end of the UST yield curve, moderation in Brent crude oil prices, and benign industrial input prices, led by weak global growth. On the tariff front, we believe the period of peak concerns & uncertainty has passed, and negotiations will guide the outlook. Hence, embarking on a front-loaded aggressive rate cycle is likely to give the RBI (and other EM central banks) necessary policy space to tweak the path as FY26 progresses.
Considering the softer growth outlook and comfort on inflation front, we revise our FY26E repo rate projection to 5.25% (100bp cut overall) vs 5.50%-5.75% earlier. In June 2025 meet, we expect another 25bp rate cut and expect banking system liquidity to turn durably positive by end-April and mid-May.
Please refer disclaimer at Report
SEBI Registration number is INH000000933
