Indian Economy: Policy space created for another repo cut

 In June, the Consumer Price Index-based (CPI) inflation eased to 2.1%, close to the lower end of flexible target range of 2-6% set by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI). This creates more policy space for yet another repo rate cut in the current cycle. 

Higher tariffs imposed by the United States (US) suggest subdued export prospects, including for India in 2025. The increased uncertainty will impact investment decisions. 

S&P Global expects global gross domestic product (GDP) growth to slip to 2.9% in 2025 from 3.3% in 2024. The US and China are projected to lead the slowdown. 

Every country needs policy space to support its economy and India’s inflation dynamics have afforded the MPC room for one in the current cycle, over and above the 100 basis points already chopped. 

Softening inflation will support urban consumption, along with the income-tax cuts announced in the budget, which will take effect this fiscal. Additionally, the sharp drop in food inflation improves the discretionary spending of lower-income groups in urban and rural areas. Our assessment shows the bottom 20% of the population faced lower headline inflation, compared with the top 20% in urban and rural areas in June.