Economists divided as central bank weighs third repo rate cut

The Reserve Bank of India’s Monetary Policy Committee (MPC) began its two-day meeting in Mumbai this week to review interest rates, while economists offer different views on how the central bank should proceed.
Some economists, like Debopam Chaudhuri of the Piramal Group, argue that now is the right time for a more aggressive 50 basis point (bps) cut. “Rate transmission picked up only after the repo rate was brought down to 6 per cent. A 50 bps cut now could speed up economic momentum,” Chaudhuri said to news agency ANI. He believes that with the US Federal Reserve expected to ease rates soon, India has a window to act boldly without hurting its appeal to global investors.

Others, however, favour a more measured approach. Sonal Badhan of Bank of Baroda supports a 25 bps cut, citing moderated inflation, a forecast for normal monsoon, and external uncertainties. "We expect the RBI to lower rates by 25bps this week. This is based on the fact that inflation has significantly moderated and is expected to remain contained in the coming months as well. Also, given the prediction of normal monsoon, pressure on food inflation will be limited," she said.

Economist M Govind Rao also sees room for rate cuts, especially with inflation below 4 per cent and global risks rising. "The inflation rate is well within the target, and there is sufficient space to reduce the rate. With uncertainty due to tariff increases and global volatility, it is appropriate to reduce the interest rate to trigger higher investment," he told ANI.

According to a Bank of Baroda report, India’s 10-year government bond yield may fall further if the RBI announces a rate cut larger than 25 basis points. It expects the yield to range between 6.15% and 6.27% in June, with a downward bias. The report also flagged rising US debt concerns, which hardened global yields and triggered investor caution.

RBI's rate cut will mark the third straight rate cut by the central bank this year. In April, the RBI reduced the repo rate by 25 basis points to 6% from 6.25%, following a similar cut in February.

As the RBI wraps up its meeting on Friday, June 6, markets and investors will be watching Governor Sanjay Malhotra’s 10 am statement closely. The decision is likely to set the tone for borrowing costs and investment sentiment in the months ahead.