RBI unlikely to cut interest rates despite declining inflation: Indranil Pan

With inflation remaining well within the Reserve Bank of India’s (RBI) target, market experts are debating whether interest rate cuts are in the offing. However, experts suggest that the central bank may prefer to tread carefully and balance growth momentum with evolving price trends.

Speaking to ET Now, Indranil Pan, Chief Economist, Yes Bank, shared his views on the outlook for monetary policy and said:

“What Madan indicated regarding very short-term inflation expectations is absolutely correct. However, when you consider the rate cut scenario, it is likely to be more of a forward-looking Reserve Bank of India and although monetary policy did not announce this figure, the monetary policy report that comes out every six months actually has an inflation rate of 5.1% for the third quarter of the next financial year delivered.”

He added that while the recent declines in vegetable prices and GST-induced changes have helped cool inflation, the RBI is unlikely to take policy decisions based on short-term moves.

“It’s very difficult for me to see the RBI reacting to the short-term phenomena of the GST cuts or the kind of decline in vegetable prices that have been much more aggressive at the lower end than at the higher end in the previous years,” Pan said.

He also pointed out that base effects and food price risks could push inflation higher next year, potentially limiting the scope for immediate monetary easing. “Any rate cut is therefore still quite high in my view and may only be achieved if there is a significant downside that we experience in terms of the growth prospects for the economy in the second half of the year, which seems relatively unlikely to a large extent,” he said. After the slowdown in the second half, Pan believes growth remains on track.

“Yes, growth in the second half is likely to be weaker than the first half, but nothing can disrupt the 6.8% growth forecast that the RBI is working with for the current fiscal,” he noted.

When asked about the trajectory of urban consumption, Pan expressed cautious optimism while pointing to mixed signals from the GST changes and the ongoing festive season.

“From an urban consumption perspective, and Madan did talk about the GST, I’m somewhat not really clear on how the GST will actually filter out of the system because when I read various news sprints, it seems to clearly indicate that at least for some commodities, not really the white goods products, but for some commodities people, especially for the FMGG, the pack sizes are being increased because of the GST in instead of the prices of the packages being reduced because of the GST,” he explained.

He further added that while festive demand may get a temporary boost, uncertainties in sectors affected by tariffs and possible job losses could weigh on consumption later.

“We really have a significant amount of uncertainty regarding the sectors that have been affected by the tariffs and those are the sectors that we need to pay attention to because of the increasing job losses and therefore the lack of income power in the urban sector,” Pan said.

Looking ahead, he warned that the post-holiday period could see a slowdown in demand.

“Due to the GST, some of the pent-up demand may actually be depleted during the festive period and hence we may see a significant reduction in consumption bias in the third and fourth quarters of the current financial year,” he concluded.

While inflation remains within the comfort zone, both interest rate cuts and the sustainable recovery of consumption essentially depend on how growth and employment trends develop in the coming quarters. For now, the RBI seems determined to keep its policy stance steady and wait for clearer signals before taking decisive steps.