Will RBI opt for a jumbo rate cut to revive the economy?

The odds of a bigger interest rate cut, at least half a percentage point, is gathering momentum among economists as future price pressures appear benign and credit demand remains subdued.

Economists from the State Bank of India and Piramal Enterprises are advocating a 50-basis-point (bps) reduction in the policy rates, due to be announced after the latest bi-monthly review Friday morning, even though an ET survey of a dozen bankers and economists indicates a 25 bps cut.

One basis point is a hundredth of a percentage point.

Currently, the repo rate—or signaling rate—stands at 6% after the central bank reduced it twice this year, by 25 bps each in February and April.

Proponents of a larger rate cut by the monetary policy committee (MPC) believe doing so would revive the credit cycle and boost economic momentum.

“We expect a 50-bps rate cut in the June policy as a jumbo rate cut could act as a counterbalance to uncertainty,” Soumya Kanti Ghosh, group chief economic advisor, SBI, wrote in his latest research report.

Similarly, Debopam Chaudhuri, chief economist, Piramal Enterprises said: “The MPC should consider a larger-than-expected 50 bps rate cut this time…A 50-bps cut now could help make up for that lost time and deliver a stronger boost to economic growth.”

India’s fourth-quarter gross domestic product (GDP) expanded at a faster-than-expected rate of 7.4% in the fourth quarter, lifting full-year growth to 6.5% and helping New Delhi retain the tag of the world’s fastest-growing major economy. However, demand growth has been uneven, with now-eased regulatory curbs on unsecured loans denting retail credit demand.

Cheaper Credit
“Weak external and urban demand along with high real rates are a drag on growth,” said a research report by ICICI Bank. “An additional 50bps rate cut would ensure lower borrowing costs and is a stimulus to push growth higher.”

Justifying a bigger rate cut, SBI’s Ghosh said inflation is expected to stay within the mandated legal band. His report stated that inflation would stay below the target inflation of 4% in FY26 until December, but may increase thereafter.

Since February, the consumer price index (CPI) has been below 4%. In the last monetary policy, the RBI had estimated consumer inflation at 4.2% for FY26.

“Lower food prices should drive CPI inflation to 3.6% in FY26 before it inches again to 4.1% in FY27, which opens up room for pushing repo rate to 5.5% implying real rate of 1.5% over FY27 and Q4FY26,” said the ICICI Bank report.

SBI’s Ghosh is of the view that a 50 bps reduction in the June policy could reinvigorate a credit cycle. Bank loans climbed 12.1% in 2024-25, lower than 16.3% the year before. SBI expects credit and deposits to advance in the range of 10%-11% during FY26.

Piramal’s Chaudhuri said the MPC should consider a larger-than-expected 50 basis point rate cut this time.

“Rate transmission gained traction only after the policy repo rate fell to 6% in April, as earlier tight liquidity conditions had kept market yields elevated…. In fact, the reduction in borrowing costs would enhance domestic growth prospects and continue to reinforce India’s attractiveness as an investment destination, regardless of the spread with US debt,” he said.