New Dehi: As the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) concludes its crucial three-day meeting on Thursday, a strong consensus among economists points to a 25 basis point (bps) cut in the benchmark repo rate, lowering it to 5.75%. This anticipated move, which would mark the third consecutive rate cut this year, underscores the RBI’s evolving accommodative stance, significantly influenced by a robust and early monsoon, and its potential to tame inflationary pressures.
The timely and above-average arrival of the monsoon across India is emerging as a critical factor in the MPC’s deliberations. Traditionally, monsoon performance has a direct bearing on food inflation, a highly volatile component of India’s CPI. This year’s optimistic forecast of 105% of the Long Period Average (LPA) for seasonal rainfall, with a margin of +/-5%, is providing significant comfort to policymakers.
“Indian agriculture has historically been subject to the vagaries of the monsoon, often referred to as ‘a gamble in monsoon’,” a noted economist said. While agriculture’s share of GDP has decreased, its impact on employment (approximately 54% of the workforce) and, crucially, food prices, remains paramount.
The positive monsoon outlook is already contributing to a subdued inflationary environment. India’s CPI inflation notably softened to 3.2% in April, the lowest since July 2019, primarily due to a sustained decline in food prices. This benign inflationary trend, supported by healthy Kharif and Rabi crop outputs and softened global crude oil prices, provides the MPC with ample policy space to prioritize economic growth.
However, some experts, including Citi, urge caution regarding the monsoon’s full impact. While early rains can aid sowing, their uneven distribution or excessive intensity in certain regions could still lead to supply chain disruptions and localized price spikes, particularly for perishable commodities like vegetables. Retail tomato, onion, and potato (TOP) prices have seen significant year-on-year declines, yet sequential trends show some “crawling back of prices” for tomatoes and potatoes in May, highlighting the need for vigilance.
Impending Rate Cut and Economic Implications
The prevailing low inflation, coupled with a four-year low in FY25 GDP growth at 6.5% (despite a Q4 FY25 rebound to 7.4%), has intensified calls for monetary easing to boost domestic demand. The RBI has already revised its FY25 GDP growth forecast to 6.6% and projects 6.5% for FY26.
Economists are largely aligned on the need for a rate cut. Sonal Varma, Managing Director and Chief Economist (India and Asia ex-Japan) at Nomura, anticipates further 25 bps cuts in June and August. Madan Sabnavis, Chief Economist at Bank of Baroda, suggests a potential 25-50 bps cut through the year, while acknowledging the need to “gauge the monsoon.” SBI Research has even advocated for a bolder 50 bps cut, citing slowing growth, easing inflation, and surplus liquidity.
The implications of a rate cut are far-reaching. Lower repo rates are expected to reduce borrowing costs for banks, which should translate into cheaper credit for businesses and consumers, stimulating investment and overall demand. This is likely to be positive for equity markets, particularly credit and consumption-sensitive sectors like banking, real estate, and autos.
For the rural economy, a strong monsoon and the anticipated rate cuts are a powerful combination. Some analysts projects 10-15% year-on-year earnings growth in agri-linked sectors in H2 FY26, driven by increased rural liquidity and demand recovery. A normal monsoon typically lifts rural incomes by 5-7%, leading to a predicted 6-8% uptick in sales for rural-focused FMCG, two-wheelers, and farm equipment segments.
Navigating Global Uncertainties
The MPC’s decision also factors in global uncertainties, including the looming threat of renewed U.S. tariffs and a weakening Chinese yuan, which are creating market volatility and putting pressure on the Indian rupee. The RBI is expected to leverage liquidity tools like Open Market Operations (OMOs) and forex management to mitigate these external risks and stabilize the currency.
As RBI Governor Sanjay Malhotra announces the MPC’s decision on Friday, June 6, at 10 AM IST, his commentary on the future trajectory of inflation, growth, and the RBI’s approach to navigating global trade risks will be closely watched. While a 25 bps cut appears largely priced in, the central bank’s guidance will be crucial for shaping market sentiment and the Indian economy’s trajectory in the coming months.