RBI could lower repo rate if GDP weakens further: Report

The Reserve Bank of India could consider further repo rate cuts if GDP growth underperforms and the US Federal Reserve adopts aggressive easing. HSBC Mutual Fund says liquidity will stay ample, with corporate bonds offering attractive spreads

New Delhi: The Reserve Bank of India’s Monetary Policy Committee (MPC) could consider further policy rate cuts if upcoming GDP data falls short of expectations and the US Federal Reserve begins aggressive easing in response to a weaker labour market, a report said on Thursday.

Any additional room for easing could open up if growth underperforms and the US Fed cuts rates to counter labour market weakness, HSBC Mutual Fund said in its report.

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In its latest policy meeting, the MPC kept the GDP growth forecast for FY26 unchanged at 6.5 per cent, with quarterly projections at 6.5 per cent in Q1, 6.7 per cent in Q2, 6.6 per cent in Q3, and 6.3 per cent in Q4.

According to the report, until such triggers appear, government securities yields are expected to remain range-bound, with liquidity conditions being the main driver. The RBI’s committee left the repo rate steady at 5.50 per cent and maintained a neutral stance after earlier cuts of totalling 100 basis points.

According to the report, the RBI’s decision to allow time for the impact of recent rate reductions to play out, while acknowledging that global uncertainties and tariff-related risks could weigh on growth, though their effect on inflation was expected to be limited.

The RBI is likely to keep system liquidity ample to ensure the benefits of earlier rate cuts are fully transmitted, while a scheduled cash reserve ratio cut next month is expected to further ease borrowing costs, the report said.

The report also pointed out that corporate bonds in the 2–4 year maturity segment are currently offering favourable spreads of 65–75 basis points over comparable Indian government bonds, and could see spread compression ahead.

With the easing cycle nearing its end, it sees an overweight position on such bonds to capture carry. A potential US Fed rate cut from September could give the RBI more room to act, particularly with inflation projected to remain benign until the fourth quarter of FY26, the report stated. The report expects the MPC to take a calibrated approach towards the end of calendar year 2025, with India’s growth momentum remaining the key focus.