RBI set for further easing — 50 bps cut possible in 2026: Report
The report emphasized that the difference between the repo rate and core CPI inflation continues to be high and this provides room for additional monetary expansion. The gap between the repo rate and core CPI currently stands at 2.8 percentage points compared to an average of 1.1 percentage points over the last seven years, indicating further interest rate cuts are likely in India.
“Given that repo minus core inflation is well above the historical average and inflation is low, there is room for further cuts (50 basis points),” it said.
The report stated that monetary expansion should lead to an acceleration of growth along with ongoing deregulation, and banks are expected to perform better as credit conditions improve.
The Reserve Bank of India announced in December that it had reduced the policy repo rate by 25 basis points to 5.25 percent. The RBI announced a reduction of 125 basis points in FY2025 as a whole.
India’s GDP growth is expected to accelerate in 2026, driven by the cumulative impact of economic reforms and RBI rate cuts implemented so far. The report stated that there is room for further easing as the repo rate minus core inflation remains well above its historical average.
While global monetary headwinds are expected to be limited, domestic factors are expected to play a larger role in supporting growth. According to the report, export-oriented direct foreign investments, especially supported by free trade agreements with the European Union and the competitiveness of the Indian rupee, are expected to make a positive contribution.
Capital expenditure is projected to pick up in the second half of FY27, giving further impetus to economic activity.
Valuation multiples of around 20.4x are generally in line with levels seen a year ago, the report on the stock market outlook said.
However, the chances of earnings growth are brighter now and Nifty is expected to return around 15 per cent from current levels. Small-cap stocks are also expected to catch up with the performance, albeit with a delay.
The report also stated that 2026 will be another year of reforms, deregulation and ease of doing business, supporting the acceleration of GDP.
Inflation risks are seen as minimal as India’s crude oil prices, which have a good correlation with CPI inflation, are expected to remain around US$65 and could be lower if Venezuela’s crude infrastructure improves.
