As per the report the Monetary Policy Committee (MPC) is likely to maintain the repo rate at 6.5 per cent in its upcoming sitting.
However, several factors, including a slowdown in economic activity and benign core inflation, are likely to prompt the central bank to soften its stance, the report added.
A weaker-than-expected Q1 GDP growth, continued slowing of high-frequency indicators in the second quarter, core inflation to the near record lows, and fiscal tightening could be the key reasons behind the move, the report added.
Additionally, the U.S. Federal Reserve’s recent move which indicates an ease in the rates will influence apex bank’s decision, the report added.
The growth rate for the first quarter of financial year 2025 was below the RBI’s projection at 7 per cent. The growth rate for the same period stood at 6.7 per cent, signalling weak economic activities. Since then, indicators such as vehicle sales, cement volumes, fuel consumption, GST collections, and rural wages have witnessed sluggishness. The government spending has also been subdued in recent months. Exports have also witnessed a sluggishness after showing recovery earlier this year.
“Overall, domestic demand is slowing amid weak exports. At the same time, fiscal policy is tightening while core inflation is near a series-low. Against this evolving growth-inflation mix, a tight monetary stance may not be warranted, particularly when the Fed has also commenced easing,” the report added.
Going forward the report highlighted that the economy may be reverting to pre-pandemic levels of weak demand, with capital expenditure-to-GDP ratios plateauing.
Further supporting its assertion, it stated that while headline inflation remains above target, core inflation has consistently declined over the past 16 months, currently ranging between 3.1 per cent and 3.3 per cent. This reflects weak pricing power in the economy and muted growth in consumption-driven sectors, the report added.
Furthermore, it states that the RBI’s fiscal policy is contractionary, with tax revenue growth declining into the single digits. This could have an effect on the government’s ability to increase capital expenditure in the upcoming quarters.
Given the slowing domestic demand, weak exports, and the tightening fiscal stance, the RBI’s current monetary stance may no longer be appropriate, according to the report.