At first glance, the odds seem rather long.
And, that assessment best explains the circumspect showing of bond yields and the Bank Nifty gauge.
Navigating the economy through a tariff minefield is a challenge, but rates don’t appear to be the tool Mint Road would seek to deploy immediately to help boost domestic consumption and offset the ostensible challenges posed beyond India’s water margin.
Rather, the forecast for economic growth in the first quarter of FY27 isn’t too low, given the long-period average. At 6.6%, monetary policy experts seem to be saying that the role of an incremental reduction in policy rates is far from material in boosting growth, and that the frontloading of policy measures should play out before further rate calibration is required.
The bigger indicator for the markets appears to have come from the inflation forecast. Unlike growth forecasts for the rest of FY26, the central bank has decisively lowered both the year-end forecast for consumer prices and the quarterly expectations for the index, although it has noted the steady rise in core inflation to underscore the seeping effects into the consumer economy by the time FY26 draws to a close.For the first quarter of FY27, the central bank has pencilled in consumer inflation at 4.9% – above the 4% legal mandate and dangerously close to the current policy rate of 5.5%.“Thus, while headline inflation is much lower than projected earlier, it is mainly due to volatile food prices, especially of vegetables,” read the monetary policy statement, explaining the rationale behind holding both the rates and the central bank’s stance. “Core inflation, on the other hand, has remained steady around the 4 per cent mark, as anticipated. Inflation is projected to go up from the last quarter of this financial year.”
At 4.9%, the consumer inflation projections leave real rates at barely 60 basis points, nearly ruling out a further reduction in rates – unless both growth slows dramatically and inflation falls significantly lower than the dot plots.
“We believe that the RBI will likely remain on a long pause as it focuses on the FY27 inflation trajectory and growth impulses remaining steady,” said Suvodeep Rakshit, Chief Economist, Kotak Institutional Equities (KIE) . “The bar for a dovish shift will be higher from here on, and dependent on substantial downside to growth prospects.”
So, given the economic necessity to keep real rates within the tramlines defined by the long-period average, the odds seem rather long – at least at this moment – for policy rates to head south. Unless, of course, the data on economic expansion surprises on the downside, while a struggling rupee fuels imported inflation and causes the consumer price gauge to spike much earlier than anticipated.
