Barclays Contemplates ‘Opportunistic Cut’ of 25 Basis Points Amid Lower-than-Expected Inflation

The RBI Likely to Cut Repo Rate in June Amid Economic Indicators

The Reserve Bank of India (RBI) is anticipated to decrease the repo rate by 25 basis points to 5.75 percent in June, driven by lower inflation and subdued economic indicators, according to Barclays. This move is seen as strategic, with the policy stance expected to remain ‘accommodative’. Barclays forecasts a 25 basis points rate reduction during the RBI MPC meeting in June.

The Monetary Policy Committee (MPC) is projected to lower the key interest rate while keeping an ‘accommodative’ approach. Despite no urgent need for a third consecutive rate cut, Barclays Chief India Economist, Aastha Gudwani, suggested that a rate cut is likely on June 6 due to the lower-than-expected inflation outcomes and outlook.

After the April rate cut, Barclays was uncertain about a June rate cut, but with inflation dropping further and activity data for April not meeting expectations, a rate cut seems plausible. The optimistic move would bring the policy repo rate down to 5.75 percent.

Economic Forecast and Factors Driving Rate Cut

Barclays estimates real GDP growth for FY26 at 6.5 percent YoY, in line with the RBI MPC’s projections. With inflation tracking below expectations, a cut in import duty for edible oils, and underwhelming high-frequency data, the MPC might opt for a 25 basis points rate cut.

Food prices are expected to be more volatile in the upcoming months, potentially impacting inflation. The recent MSP hikes for Kharif crops could add pressure to food inflation, as certain crops are trading below their MSPs. However, the overall impact would rely on crop output and the government’s procurement strategy.

Liquidity Situation and RBI’s Stance

With liquidity in surplus following the RBI’s dividend injection, there’s no immediate need for additional liquidity support. Governor Sanjay Malhotra emphasized in the April meeting that liquidity decisions are solely the RBI’s prerogative, not the MPC’s responsibility.

The RBI is expected to remain agile in ensuring ample liquidity availability, stepping in with measures as necessary. Governor Malhotra is likely to reaffirm the RBI’s commitment to maintaining adequate liquidity levels and being proactive in addressing any liquidity concerns.