The Reserve Bank of India’s latest monetary policy review has significantly shifted the tone of forward guidance, setting the stage for a sustained easing cycle in the coming months. With the Monetary Policy Committee (MPC) reducing the repo rate by 25 basis points and pivoting to an “accommodative” stance, analysts and market participants now widely expect a series of repo rate reductions to follow. The move from a neutral to an accommodative stance—a term that effectively rules out any possibility of rate hikes—has been interpreted as a marked shift in monetary policy priorities, especially in the context of India’s improving inflation outlook.
RBI’s inflation forecast for FY26 has been revised downward to 4%, a target that aligns closely with its medium-term objective. If the central bank were to maintain a real interest rate of 1.5%, the terminal repo rate in the current cycle could drop to 5.50%, signaling the potential for a further 50 basis points in rate cuts. This sets up the likelihood of sequential reductions, with cuts expected in the upcoming June and August MPC meetings, as the central bank positions itself to support growth while inflation remains in check.
Highlights:
RBI adopts dovish tone with an accommodative policy stance
Repo rate cut of 25 bps delivered; more expected in June and August
Real rate assumption of 1.5% implies terminal repo rate at 5.50%
Inflation forecast for FY26 revised downward to 4%
Disinflation Momentum Gains Strength as Vegetable Prices Continue to Ease
The foundation for the RBI’s dovish posture is the mounting confidence in the disinflationary momentum observed in recent months. After enduring a prolonged phase of policy tightness lasting nearly two years, headline inflation has now decisively turned downward. In February, the Consumer Price Index (CPI) registered a lower-than-expected print of 3.6%, aided by consistent easing in vegetable prices. According to the National Horticulture Board, vegetable prices saw another sequential decline of nearly 2% in March, which bodes well for another soft inflation reading.
This sequential deflation in food prices, especially vegetables, has been a crucial development in aligning actual inflation outcomes with RBI’s targets. Unlike past cycles where inflation often remained sticky due to food price volatility, the current trend reflects structural improvements, aided in part by supply-side interventions and better crop output. This sustained easing has made the 4% inflation goal more attainable and durable, giving the central bank greater flexibility in policy maneuvering.
Highlights:
February CPI inflation at 3.6%, below market expectations
Vegetable prices declined for the fourth consecutive month
NHB data indicates additional 2% drop in March food prices
Softening food inflation strengthens case for more rate cuts
Record Rabi Crop Output and Stable Expectations Reinforce Price Stability Outlook
Further bolstering the RBI’s confidence in the inflation trajectory is the robust agricultural output, particularly from the rabi harvest. A record wheat crop and increased production of pulses have contributed to stable food supply dynamics. This, coupled with healthy buffer stocks maintained by government agencies, acts as a key inflation stabilizer, reducing the risk of supply-driven price shocks during the summer and festive seasons.
In addition, household inflation expectations are adjusting favorably. The March 2025 round of the RBI’s Household Inflation Expectations Survey showed that both three-month and one-year forward expectations declined by 40 and 50 basis points, respectively. These data points are crucial as they suggest an anchoring of expectations at lower levels, which is essential for maintaining long-term price stability. They also validate the central bank’s view that disinflation is gaining credibility in the minds of consumers, which further supports the accommodative stance.
Highlights:
Record wheat and pulses output improves food supply outlook
Household inflation expectations dropped 40-50 bps in March survey
Comfortable buffer stocks reduce risk of food inflation spikes
Anchored inflation expectations enhance policy flexibility
Global Slowdown Prospects and Tariff Effects Create Disinflationary Environment
While domestic factors are increasingly supportive of rate cuts, external dynamics also contribute to the overall disinflationary backdrop. The global economic environment is under strain, with markets anticipating a slowdown in major economies, particularly the United States and China. In the US, recessionary signals are becoming more pronounced, while China faces significant headwinds due to punitive tariffs—some exceeding 100%—from Western economies. These global trends have led to a correction in Brent crude oil prices and a decline in industrial metal costs, both of which work in India’s favor by keeping input prices subdued.
These international developments help to cushion India from external inflationary shocks and offer a benign external price environment. Yes Bank, in its internal projections, now anticipates headline inflation to fall within the range of 3.5–3.7% for FY26, assuming normal monsoons and absence of any severe supply chain disruption during the summer. The RBI’s official estimate of 4% for FY26 is seen as conservative in this context, offering room for downward surprises.
Highlights:
US and China growth risks create global disinflationary trend
Brent crude and industrial metal prices have fallen significantly
Tariffs may dampen global demand, aiding India’s inflation control
Yes Bank forecasts FY26 inflation at 3.5–3.7%, below RBI’s 4% estimate
Shift to Growth-Focused Monetary Policy Amid Global Trade Volatility
With inflation expectations anchored and food price pressures subdued, the RBI now finds space to redirect policy toward supporting India’s growth recovery. While India’s GDP growth has remained resilient, risks remain on the horizon. The imposition of tariffs on Indian goods and the possibility of reduced global trade flows could negatively affect export-led sectors. The RBI has recognized that the economic impact of such trade barriers is likely to be more growth-destructive than inflationary, thereby necessitating a proactive stance in safeguarding domestic economic momentum.
The central bank has modestly revised down its GDP forecast for FY26 from 6.7% to 6.5%, citing rising global uncertainties. Despite these challenges, factors such as a strong agricultural outlook, improved rural consumption, and supportive fiscal policy through income tax cuts are expected to act as buffers. The monetary easing currently underway is designed to complement these factors, ensuring that domestic demand does not falter in the face of global headwinds.
Highlights:
RBI shifts focus from inflation control to growth support
FY26 GDP growth forecast revised to 6.5% from 6.7%
Tariff impact seen as more growth-negative than inflationary
Rural consumption and tax cuts expected to support demand
Transmission and Liquidity Management Take Center Stage Post Rate Cuts
Even as the RBI pivots toward easing, it is aware that the efficacy of rate cuts depends on smooth transmission to the real economy. To that end, the central bank has remained proactive in ensuring adequate liquidity in the banking system. Current liquidity conditions are favorable, with the banking system operating in surplus and the Weighted Average Call Rate closely aligned with the repo rate. However, the RBI refrained from making any fresh liquidity announcements in the April meeting, focusing instead on reinforcing its existing accommodative framework.
The emphasis going forward will be on encouraging banks to pass on the benefit of repo rate cuts to consumers and businesses. This will involve close monitoring of credit conditions and ensuring that lower policy rates are reflected in lending rates. The effectiveness of this transmission process will be critical in determining whether the easing cycle delivers the desired economic outcomes.
Highlights:
Focus shifts to transmission of policy rate cuts to lending rates
Banking sector liquidity remains in surplus; operative rate aligned with repo
No new liquidity measures, but RBI maintains readiness to act
Transmission effectiveness key to monetary policy success
