RBI To Reduce Repo Rate 50-75 Bps In FY26: CRISIL Report

The Reserve Bank of India (RBI) is likely to lower the repo rate by 50-75 basis points (bps) in the financial year 2025-26 to spur consumption and lower borrowing cost, the CRISIL (Credit Rating Information Services of India Limited)  India Outlook 2025report said. The report points out that accommodative monetary policy, along with the steps taken by the government to spur private consumption, will expedite India's economic growth in the coming fiscal year.

The repo rate was kept unchanged by the central bank at 6.5 per cent since April 2023, following a 250 bps hike between May 2022 and February 2023 to contain inflation. The RBI cut its repo rate by 25 bps in its February 2025 during the monetary policy review for the first time in almost five years to boost a slowing economy. More rate cuts in FY26 are expected by analysts, which will help consumers and companies alike. The report has established that lower interest rates will sequentially percolate to lower lending rates for the corporate and retail sectors, benefiting consumption modestly. Transmission into retail and corporate loans will depend on banks' inclination to decrease lending rates.

FY26 expansion will also be supported by a 10.1 per cent rise in government capex, as reflected in the Union Budget 2025. The government is gearing up to invest in infrastructure expansion, digital economy projects, and manufacturing growth, which are most likely to be growth-friendly for the overall economic scenario.

Even with all these initiatives, the report highlights that India's fiscal deficit will reduce from 4.8 per cent of GDP in FY25 to 4.4 per cent in FY26. This implies that the overall fiscal stimulus might be less than last year, which might curb the degree of stimulus-led growth.

The CRISIL report also anticipates further easing of inflation in FY26, helped by lower crude oil prices and improved food supplies. As of early February 2025, Rabi sowing was higher by 1.5 per cent year-on-year, suggesting consistent food production in the coming fiscal year. Unless farm output softens, food inflation is likely to stay within the RBI comfort zone.

In addition, commodity prices overseas will also soften, with CRISIL Intelligence projecting crude oil prices to be between 70-75 dollars a barrel in FY26, lower than 78-83 dollars a barrel in FY25. Soft oil prices will assist in keeping fuel and transport costs under control, reducing input costs for industries and stemming inflationary pressures from getting out of hand.

Yet, there remain external threats. Geopolitical tensions, waning global demand, and policy shifts in leading economies in the future are some of the future global threats to India's export economy. Private sector investment revival in India faces the threat of global trade and investment uncertainty.

India's economy indicated a revival in the December quarter of 2024 with a growth rate of 6.2 per cent, after falling to a seven-quarter low of 5.6 per cent in the July-September quarter. Private and public consumption, as well as the services and agriculture sectors, were the main drivers of growth.

Capital formation, the proxy for spending on business development and infrastructure investment, continued to be sluggish at 5.7 per cent in Q3 FY25 from 5.8 per cent in the quarter before. Year-on-year fixed capital formation eased to 6 per cent in FY25 from 9.8 per cent in FY24. Private consumption strengthened to 6.8 per cent in FY25 from 5.3 per cent in FY24, evidence of greater demand from consumers.

A 50-75 bps cut in the repo rate in FY26 can cut home loans, auto loans, and business credit, which would become less expensive, leading to more consumption and investment. Lower borrowing costs would also help real estate and auto sales, two of the most interest-rate-sensitive industries.

Additionally, given that inflation would remain subdued, consumers might get to experience level purchasing power as well as equivalent demand for commodities and services. The effect would, nonetheless, be a function of how banks reduce rates held by their clients.

India's FY26 economic prospects are upbeat with a mix of softer monetary policy, government capex, and inflation stability driving growth. But headwinds like global economic uncertainties, fiscal pressures, and investment revival are areas to be monitored.

The CRISIL India Outlook 2025 report states that while the RBI rate cuts will provide relief, a broad-based recovery would require consistent policy efforts and involvement of the private sector. Growth and macroeconomic stability would have to be balanced in order to ensure long-term economic resilience as India begins the next financial year.