India's central bank, the Reserve Bank of India (RBI), has likely concluded its current cycle of interest rate reductions, according to a new analysis from YES Bank. Economists at the bank forecast that the RBI will now enter a prolonged period of holding rates steady while maintaining its neutral policy stance.
End of the Easing Cycle
In a recent report, YES Bank economists Indranil Pan and Khushi Vakharia stated that the RBI's current interest rate cut cycle is over. They believe the central bank will maintain a long pause unless there is a severe deterioration in the country's economic growth momentum. The policy stance is expected to remain 'neutral'.
The economists added that the RBI's focus will likely shift to ensuring comfortable liquidity conditions in the financial system and anchoring the operative market rate close to the repo rate.
December Rate Cut and MPC Minutes
This assessment comes after the RBI's Monetary Policy Committee (MPC) cut the repo rate by 25 basis points to 5.25% on December 5. The committee had maintained a neutral stance during that policy announcement.
The minutes from that December meeting, made public on Friday, December 19, revealed the rationale behind the decision. MPC members voted for the cut citing benign inflation and emerging signs of economic weakness. The minutes underscored the RBI's commitment to supporting growth momentum, even as it acknowledged that growth, which was stronger than expected in the first half of the fiscal year, is projected to soften in the second half.
"MPC members noted that inflation remains below the lower bound of the flexible inflation targeting (FIT) framework and thus necessitates counter-cyclical action from the central bank," the YES Bank report highlighted.
Inflation Concerns and New CPI Series
A key factor influencing future policy is the trajectory of inflation. Retail inflation, measured by the Consumer Price Index (CPI), rose to 0.71% in November from 0.25% in October. The MPC's mandate is to target CPI inflation at 4% within a band of +/- 2%.
YES Bank pointed out a significant upcoming change: the next MPC meeting is scheduled after the Union Budget and will coincide with the release of a new CPI series. This series will feature a changed base year and a restructured weighting diagram, based on the Household Expenditure Survey of 2022-23.
"The new CPI will likely lead to lower food weightage, and thus the comfort derived from low food prices could be limited," the economists noted. This structural shift could alter the inflation assessment landscape.
Given these dynamics, YES Bank's final outlook is clear: While the MPC is expected to keep a neutral stance, further rate cuts are unlikely unless economic growth falters significantly. The era of monetary easing appears to have paused, with the central bank poised to watch incoming data, especially on growth and the new inflation prints, very closely.
