RBI May Consider Rate Cuts Amid Weak Urban Demand and Easing Inflation

The Reserve Bank of India (RBI) could consider reducing policy rates to navigate soft urban consumption and an unpredictable external demand landscape, according to a report by ICICI Bank. The central bank's potential for easing comes as it adheres to a data-driven strategy within a neutral policy framework.

The Monetary Policy Committee (MPC) is weighing the opportunity to cut policy rates by 25 basis points as early as August. The report highlighted that neutral monetary policy, driven by easing inflation figures and sluggish growth indicators, provides leeway for such a reduction, bringing the terminal rate down to 5.25 percent.

The report anticipates that August is an optimal time for such action due to a muted inflation outlook, with significant slowdowns observed in food-related price indices. A notable drop in vegetable prices and overall food inflation underpins this deceleration, coupled with higher-than-normal rainfall that promises robust cereal production.

Near-term inflation is projected to remain low, even as core inflation trends upwards. The global economic slowdown affects exports, with mixed trends visible in various High Frequency Indicators (HFIs). Despite early year growth, GST collections revealed a significant decline, reaching a 50-month low in terms of year-on-year growth in June.

(With inputs from agencies.)