A significant drop in India’s retail inflation to record lows is fueling calls for interest rate cuts, highlighting concerns over weakening demand.
India has witnessed a substantial decrease in retail inflation, reaching a six-year low, prompting discussions about potential interest rate cuts within the year. Analysts suggest that this decline underscores a weakening demand in the economy, necessitating further financial stimulus.
The drop in June’s headline inflation is paired with low core inflation, which remains below 4% when excluding gold, silver, and fuel prices. This indicates softer underlying consumption, which analysts believe could require additional support from monetary policy.
The Reserve Bank of India (RBI) executed a greater-than-expected interest rate cut of 50 basis points in June, changing its stance to ‘neutral,’ which signaled limited scope for additional cuts. However, the unexpected inflation figures from Monday have led to increased speculation about further easing. Swap rates have declined, reflecting market bets on at least one more rate cut.
Economist Radhika Rao from DBS Bank anticipates another 50 basis point cut in the current easing cycle. She said the softer-than-expected data, such as production, credit growth, and auto sales, alongside inflation figures below projections for the first half of fiscal 2026, will likely motivate the RBI’s monetary policy committee to further reduce rates, without specifying a timeframe.
The next RBI policy review is in early August, but analysts predict the bank will wait for more data and clarity regarding global trade tensions before acting, potentially in September or October.
Signs of weak demand are emerging in sectors like automotive and real estate. Car sales to dealers in June hit an 18-month low, and home sales in India’s top seven cities fell by 20% during the April-June quarter, according to a report from real estate consultancy Anarock.
Gaura Sen Gupta, chief economist at IDFC First Bank, expects the central bank to cut rates once more in either October or December, citing high-frequency indicators that continue to show moderation in urban consumption and private capital expenditures.
India’s central bank projects inflation for the year to remain below 3.7%, as Governor Sanjay Malhotra told CNBC TV-18. He emphasized that the monetary policy committee will consider both the current and future inflation outlook when deciding on further rate adjustments.
In an earlier interview following the June policy decision, Governor Malhotra noted that lower-than-expected inflation could provide additional room for policy maneuvering. Economist Samiran Chakraborty from Citi mentioned that despite the RBI’s ‘neutral’ stance, the softer Consumer Price Index (CPI) figures present an opportunity for some monetary easing.
The average inflation rate in the April-June quarter was 2.7%, below the RBI’s forecast of 2.9%. Citi projects July’s inflation could hit a record low of 1.1% and estimates an annual average of 3.2% for the financial year 2025-26, the lowest since 1990.
The deceleration in urban consumption in India, attributed to weak wage growth and depleted household savings, began last year. Despite a rural demand recovery following a strong monsoon, progress has been inconsistent.
Sales of two-wheel vehicles, a rural demand proxy, increased by merely 4.7% in June but dropped 12.5% month-on-month. Private investment also remains sluggish, with capacity utilization stuck at around 75–76% for over a year—below the threshold typically needed to spur new capital expenditures.
Madhavi Arora, an economist at Emkay Global, suggested that investment is unlikely to see immediate growth due to global trade uncertainties and a skeptical domestic demand outlook. She pointed out that India’s growth seems stagnant at a range of 6.0%–6.5%, largely due to absent private sector participation.
Although government capital expenditures rose in the first quarter of fiscal 2026, the previously announced tax cuts in the budget limit further fiscal stimulus options. According to IDFC’s Sen Gupta, with constraints on fiscal policy to stimulate growth, monetary policy will need to play a critical role.
Source: Original article