Easing inflation widens space for further rate cuts: Finmin June Economic Review

Mint

4 days ago

New Delhi: The finance ministry on Monday held out hopes of further interest rate cuts, citing muted core inflation, coupled with headline inflation falling well below the Reserve Bank of India's (RBI's) 4% target.
'Core inflation remains subdued, and overall inflation is comfortably below the RBI's 4% target, affording room for the easing cycle to be sustained,' the ministry noted in its June Monthly Economic Review.
The RBI has projected headline inflation at 3.4% for the second quarter of FY26, while actual inflation in Q1 came in below the central bank's target.
'It appears likely that the full fiscal year inflation rate would undershoot the central bank's expectation of 3.7%,' the ministry added.
With price pressures easing and growth remaining a priority, the RBI has cut policy rates three times in 2025, lowering the repo rate by a cumulative 100 basis points from 6.50% to 5.50%.
The easing cycle began with a 25-basis point cut in February, followed by another in April and a sharper 50-basis point reduction in June, marking a decisive turn towards an accommodative stance.
Between January and June 2025, retail inflation eased steadily, offering crucial support to the RBI's rate-cutting cycle.
Headline CPI inflation declined from 4.31% in January to a 77-month low of 2.10% in June, driven largely by a sharp fall in food prices, especially vegetables and a favourable base effect.
Food inflation turned negative in June, pulling down overall price pressures, even as core inflation remained sticky, hovering around 4.4%.
However, despite monetary easing and improved banking sector balance sheets, credit growth has shown signs of slowing, reflecting a mix of cautious borrower sentiment and risk-averse lender behaviour, the economic review said.
"A growing preference for bond markets, particularly commercial papers among corporates due to lower borrowing costs, may also explain the shift," it said.
"Piggybacking on initiatives like the Employment Linked Incentive (ELI) scheme, it is time for corporates to set the ball in motion," it added.
To be sure, despite the potential on the domestic front, global geopolitical and economic risks remained elevated.
The war in Ukraine, with renewed Russian offensives, along with rising instability in West Asia, continued to cloud the global economic outlook, adding pressure on supply chains and investor sentiment.
"Despite the broadly positive outlook, downside risks remain. While geopolitical tensions have not elevated further, the global slowdown, particularly in the US (which shrank by 0.5% in Q1 2025), could dampen further demand for Indian exports," the review said.
"Continued uncertainty on the US tariff front may weigh on India's trade performance in the coming quarters," it added.
India and the US, meanwhile, have been negotiating trade deal, working to an end-of-August deadline.
Meanwhile, the review cautioned that slow credit and tepid private investment may constrain growth acceleration, even as deflation in wholesale prices skews real economic indicators.
'Measured in constant prices, economic activity may appear healthier than it is. All that said, the economy has the look and feel of 'steady as she goes' as far as FY26 is concerned,' it said.
'In the medium term, given the ongoing momentous shifts in global supply chains in the areas of semiconductor chips, rare earths and magnets, India has its task cut out,' it added.