The Reserve Bank of India (RBI)’s six member Monetary Policy Committee (MPC) is expected to cut the key interest rate in its June meeting, while retaining the stance as ‘accommodative’. Aastha Gudwani, Chief India Economist, Barclays, said that despite no pressing need for a third successive rate cut on June 6, the central bank is expected to cut repo rate. Calling it an ‘opportunistic move’ amid the lower-than-expected inflation outcome and outlook, Barclays pencilled a 25 basis points (bps) cut, taking the policy repo rate to 5.75 per cent.
“While we see less merit in the MPC staying on hold in June, we also do not see a reason for the committee to be overly dovish, Aastha Gudwani said. She further maintained that the committee will likely want to retain the optionality to decide on the timing on the next move and will avoid providing a signal for future meetings beyond the status quo or rate cut option.
Earlier on April 9, the RBI MPC had unanimously announced a rate cut of 25 bps to 6 per cent. Consequently, the standing deposit facility (SDF) rate is 5.75 per cent, and the marginal standing facility (MSF) rate and the bank rate are adjusted to 6.25 per cent. The MPC had also changed its policy stance to ‘accommodative’ from ‘neutral’.
Opportunistic cut amid reduced exigency
After the April 9 policy meeting, Barclays was unsure if a third consecutive cut would happen in June. However, with April CPI inflation falling further to 3.16 per cent year-on-year, it became clear that the central bank—focused on inflation targeting—would “find it hard not to cut rates again”, especially since inflation was expected to fall short of the target by about 50bp for the April-June quarter.
Why go for a cut again in June? Aastha Gudwani said, “Lower-than-expected inflation outcome and outlook, underwhelming high frequency activity data for April, in-line GDP growth print for Q4 FY24-25, modest MSP increases, a cut in edible oil import duty are the some of the key reasons why we believe the RBI MPC could likely deliver a third successive repo rate cut of 25bp on June 6 while retaining the stance as ‘accommodative’.”
Growth forecast
For FY26, Barclays estimated real GDP growth at 6.5 per cent YoY, and said that the RBI MPC is likely to retain their growth forecast at 6.5 per cent YoY as well. Real GVA and GDP growth for Q4FY25 came in slightly above expectations, which prompted the brokerage firm to reconsider its June rate cut call. However, it said, the main reason for over 7 per cent GDP growth in Q4 was a boost from net indirect taxes (due to lower subsidies), which added 1.3 percentage points to headline growth. GVA growth at 6.8 per cent year-on-year was also stronger than expected, partly due to a 30bp upward revision in Q3 data and stronger manufacturing GVA, supported by better operating profits. Overall, FY25 growth slowed to 6.5 per cent from 9.2 per cent the previous year.
Inflation forecast
With April CPI inflation at 3.16 per cent YoY and May tracking lower than 3 per cent YoY (with a similar rate likely in June), Barclays expected Q1FY26 CPI inflation (April-June) to average around 2.9-3.0 per cent YoY. This is much lower than the MPC’s forecast of 3.6 per cent YoY, opening up the window for a potential rate cut.
“Such a sizable undershoot of the MPC’s inflation forecast in Q1 could likely tempt the RBI MPC to revise down their CPI inflation forecast further from 4 per cent YoY (was revised down by 20bp in the April meeting), but we believe it may be prudent to retain it,” the Barclays report said.
Further, food prices are expected to become more volatile in the coming months, especially for vegetables. Although an early monsoon usually helps keep food inflation in check, recent patchy rains have already pushed up some vegetable prices. Parts of western India have seen heavy rain since mid-May, which could damage crops like onions, delay deliveries, and spoil supplies such as tomatoes. Meanwhile, tomato prices have risen by about 5 per cent in the past couple of weeks.
The government has approved new Minimum Support Prices (MSPs) for 14 Kharif crops for the 2025-26 season, with increases ranging from 3 per cent (paddy) to 13.9 per cent (ragi). These MSPs are set at a level of at least 1.5 times the average cost of production. Importantly, the price hikes for key crops with higher CPI weights—like paddy and tur—are smaller than last year, while increases are higher for crops like coarse cereals and some oilseeds, which have lower CPI weights.
MSPs only affect market prices when they are above current mandi (wholesale) prices. Right now, crops like tur, urad, groundnuts, and soybeans are trading below their MSPs. So, the MSP hike could raise food inflation by about 15–20 basis points. However, the overall impact will also depend on the actual Kharif crop output and the government’s procurement strategy.
The government has cut the basic customs duty on crude edible oils (like palm, soy, and sunflower oil) from 20 per cent to 10 per cent, reducing the total effective duty to 16.5 per cent. But, the basic customs duty on refined oil remains unchanged at 35.75 per cent. “It remains to be seen whether the cut in customs duty on crude edible oils gets translated into refined edible oils with some lag,” Barclays said.
No immediate need for liquidity support amid surplus conditions
With liquidity already in surplus, boosted by the RBI’s Rs 2.7 trillion dividend, Barclays said, there’s no immediate need for the RBI MPC to announce more liquidity support. Governor Sanjay Malhotra had, in the April 9 meeting, clarified that liquidity decisions are the RBI’s responsibility, not the MPC’s. The RBI is expected to stay flexible and step in with measures as needed to ensure adequate liquidity. “We expect the Governor to maintain that the RBI will continue to be nimble and will “proactively take appropriate measures to ensure adequate liquidity,” Barclays added.