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The global economy is entering a period of both uncertainty and disruption
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For the second consecutive policy meeting, the Monetary Policy Committee (MPC) of the RBI unanimously cut the repo rate by 25 basis points (bps), in line with market expectations. This was accompanied by a paring in its projections for FY26 for GDP growth and CPI inflation by 20 bps each, to 6.5 per cent and 4 per cent, respectively.
Further, the stance was revised to accommodative from neutral. This suggests a high likelihood of another 50 bps of rate cuts over the next six months, taking this down-cycle to a sizeable 100 bps.
Inflation projection
The MPC reduced its FY26 CPI inflation projection by 20 bps to 4 per cent from 4.2 per cent previously, bringing it in line with the mid-point of its medium-term inflation target. This benefits both from the welcome fall in the food inflation seen over the last 2-3 months, as well as the recent sharp reduction in the price of crude oil, to $61/bbl from well over $70/bbl after the announcement of reciprocal tariffs by the US.
Subsequently, the government raised the excise duty on petrol and diesel by ₹2/litre each to shore up its revenues, which we estimate will net it an additional ₹35,000 crore.
While the benefit of lower crude prices has not been passed through to end-consumers, the decline in prices of non-administered fuels and derivative of crude oil will soften the input prices of various productive sectors of the economy, and hopefully transmit to lower prices of final goods over a period of time.
The MPC’s revised CPI estimate for FY26 broadly aligns with our own projection, notwithstanding some differences in the quarterly forecasts. However, any untoward depreciation of the rupee or a sharp rise in global commodity prices owing to changing trade patterns, along with adverse weather events and an uneven monsoon, pose upside risks to inflation. Simultaneously, slowing global growth and the associated dip in commodity prices could provide some buffer.
The MPC revised its growth projections downwards to 6.5 per cent from 6.7 per cent. Undoubtedly, the global economy is entering a period of both uncertainty and disruption. While domestic demand and government capex offer India substantial buffers, merchandise exports, sentiment and private capex are likely to feel the pinch over the next couple of quarters, at least.
The tariff hikes in the US are likely to lead to some demand destruction and hurt India’s exports, the impact of which is difficult to quantify at the current juncture and will depend on the evolution of relative tariffs, as countries negotiate with the US. Besides, cheap imports from countries such as China flooding Indian markets pose risks to domestic manufacturing and investment activity. We have reduced our GDP growth forecast for FY26 to 6.2 per cent from 6.5 per cent, 30 bps lower than the MPC’s estimate for the fiscal, amid expectations of an undershooting across most quarters.
Overall, the cut in the MPC’s growth and inflation forecasts, along with the change in the policy stance, provides a clear indication of further monetary easing. In the near term, the impact of the ongoing heatwave on food prices, monsoon forecast, movements of the rupee vis-à-vis other currencies, changes in global trade patterns and the impact of the same on India’s exports, the degree of slowdown in global economic activity, and changes in relative tariffs would have a bearing on India’s growth-inflation outcomes. The evolution of these factors will determine the timing of the next rate cut.
The writer is Chief Economist, Head – Research & Outreach, ICRA
Published on April 9, 2025
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