Weak urban demand, global uncertainty open door for policy rate cut: Report

NEW DELHI: Soft urban consumption and an uncertain external demand environment have created scope for the Reserve Bank of India (RBI) to ease policy rates, a report by ICICI Bank said, as the central bank navigates a data-dependent approach amid a neutral stance.

“Monetary policy is forward looking and next year inflation prints are likely to move higher on the back of a low base, but weak urban and uncertain external demand (tariffs) has opened up room for easing”, the report added.

In light of easing inflation and subdued growth momentum, the Monetary Policy Committee (MPC) could find room to lower the policy rate by 25 basis points as early as August, according to a report by ICICI Bank.

“Given that the stance is neutral, which implies a data-dependent approach, a downward revision in inflation opens up room for further easing when growth is showing somewhat a downside bias or at least no reason for any upward revision. Hence, we believe this opens up policy space for an additional 25bps rate cut, taking the terminal rate to 5.25 per cent,” the report added.

“When would the MPC cut the policy rate? We believe that August would be the appropriate time for the same, given the muted inflation scenario,” the report further added. Backing its assertion, inflation prints are showing broad-based deceleration led by food. While inflation in Q1FY26 has come in 20bps below MPC’s forecast, Q2 and Q3 forecasts are likely to undershoot MPC forecasts by a much wider margin.

The undershoot is driven by food inflation, which at -1.1 per cent YoY is the weakest in over seven years. Within the food basket, the decline is driven by vegetable prices, which fell by 19 per cent YoY. While a high base explains the moderation in vegetable prices, the deceleration in other food segments, ranging from pulses (-11.8 per cent YoY) to cereals (3.7 per cent YoY) and spices (-3 per cent YoY), implies the same is quite broad-based.

With this year’s rainfall above normal as of now, cereal output should remain buoyant this year, as seen in sowing as of now (6 per cent higher than last year). The report stated that near-term inflation prints are likely to remain quite low. On the other hand, core inflation has been witnessing a gradual

As per the report, the impact of weak global economic momentum and uncertainty is visible in relatively muted exports as seen in June. While exports to the US are doing well, exports to other geographies are tepid. Various High Frequency Indicators (HFIs) show a mixed outlook on growth. For instance, after displaying strong growth at the beginning of the year, GST collections dropped to a 50-month low of 6.2 per cent YoY in June (collections for May). (ANI)