Rate-cut expectations low

The run-up to the August Monetary Policy Committee (MPC) meeting following the June decision has been interesting.

- ANUBHUTI SAHAY

Expectations around this week's repo rate decision have swung from "a foregone hold" to "a close call" (between a cut and a hold) and are now back to "mostly a hold decision".

Three events have defined the twists and turns in expectations around August's decision. First, when the MPC front-loaded its rate action in early June, it indicated limited room to ease going forward. Thus, back then, the August 4-6 decision was seen as an "inevitable hold", especially as 100 basis points (bps) of rate cuts had already been delivered over five months.

Then came the positive headline inflation surprise. The first quarter of FY26 (which ended in June) saw a consumer price index (CPI) of almost c. 100 bps, lower than most forecasts—the MPC had forecast Q1 CPI at 2.9%, while a survey of professional forecasters put it at 3.3%. Even the forward-looking trajectory for the second and third quarters seems favourable; most forecasts (including ours) have been lowered by c. 50-100 bps. It is expected that CPI will stay below 3% through the end of December, and the MPC will revise its FY26 CPI forecast to 3% from 3.7%.

Such sharp downward inflation revisions usually provide room for rate cuts, especially if risks related to economic activity and inflation are asymmetrical. Currently, upside risks to inflation are seen as limited while downside risks to growth are higher amid external-sector uncertainty. As elevated real rates of more than 200 bps since the fourth quarter of FY25 could impinge on growth, the clamour for rate cuts has increased since the mid-June/July inflation release.