Reserve Bank-led MPC may deliver third straight rate cut as inflation undershoots

India's central bank is widely expected to deliver a third consecutive rate cut on Friday as muted inflation provides ample space to focus on boosting economic growth further.

A strong majority of economists, 53 of 61, in a Reuters poll expect the Reserve Bank of India's monetary policy committee (MPC) to cut the repo rate to 5.75%. Two respondents see a cut of 50 basis points and the remaining six expect no change.

"Despite no pressing need for a third successive rate cut on June 6, we expect the MPC to cut - an opportunistic move amid the lower-than-expected inflation outcome and outlook, and retain the stance as 'accommodative'," Barclays economists wrote in a note.

"The RBI may be tempted to lower inflation forecasts, but it may be prudent not to," they added.

Retail inflation has slowed faster than expected and dropped to a near 6-year low of 3.16% in April. The RBI expects it to average around 4% during the year but many economists expect it to be lower.

On the growth front, India's GDP surged 7.4% in the March quarter, much faster than forecasts and driven by construction and manufacturing.

Full year growth for 2025 financial year that ended in March is estimated at 6.5% and the RBI expects the pace to be retained in fiscal 2026, though the outlook faces challenges given a global slowdown and U.S. President Donald Trump's tariff uncertainties.

"RBI's estimate of neutral real rates is between 1.4% and 1.9%. In an environment of softer global growth, the neutral real rate is likely to be closer to 1.4%," IDFC First Bank chief economist Gaura Sen Gupta wrote.

"The risk of overheating of the economy remains low with persistence of a negative output gap as indicated by persistently low core inflation and low current account deficit," she added.

Economists and traders expect the RBI to continue focusing on enhancing monetary transmission by keeping system liquidity in a surplus.

Since January, the RBI has infused nearly $100 billion into the banking system.

"Apart from 25 bps cut in repo rate, there could be some probability of widening of the corridor to 50-basis between repo and SDF (standing deposit facility) rate," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.

A sharp fall in India's treasury bill yields indicates that the central bank could widen the policy rate corridor at its meeting, five bond traders said last week.

Indian lenders have also urged the central bank to revert to overnight liquidity management operations and sought easier cash reserve requirements, four sources familiar with the matter said.