MUMBAI: The Reserve Bank of India (RBI) is unlikely to cut interest rates further in the current cycle as rising headline inflation limits space for monetary easing, Neelkanth Mishra, chief economist at Axis Bank and head of global research at Axis Capital, said on Tuesday.
While no more rate cuts are expected, Mishra said that keeping rates “lower for longer” is a reasonable scenario to factor in. “I don’t expect more rate cuts because headline inflation will start rising,” said Mishra, also a part-time member of the Economic Advisory Council to the Prime Minister of India.
He expects headline inflation to average around 4% in FY27.
The RBI’s monetary policy committee (MPC) cut the repo rate by a cumulative 125 basis points (bps) in 2025 to support economic growth amid benign inflation. (One basis point is a hundredth of a percentage point.) On 5 December, the RBI projected retail inflation for FY26 at 2%, with inflation rising from Q4 and reaching 4% in Q2 of the next financial year.
India’s retail inflation measured by the consumer price index stood at 0.7% in November, up from 0.25% in October.
“Despite above-trend growth, we do not expect inflation to really reach a point where it requires policy tightening,” said Mishra. Trend growth is defined as a sustainable rate of growth taken over a period of time.
According to an Axis Bank report dated 10 December, ongoing regulatory reforms are likely to support upward revisions to trend-growth assumptions. Given the economic slack, the economy can sustain above-trend growth for a few years before inflationary pressures build up, Mishra had noted in the report.
Government data released in November showed that the Indian economy grew 8.2% in the three months through September, beating both economists’ estimates and the RBI’s 7% forecast.
Mishra emphasized that even with above-trend growth, inflationary pressures remain limited due to the existing output gap—the difference between actual production and the economy’s potential output.
Mishra highlighted in the report that while core inflation excluding precious metals has remained below 3%, academic research backed by Indian data suggests that median inflation provides a better gauge of underlying price pressures.
“This has been stable near 3% for 18 months and signals persistent slack in the economy. This is why, despite above-trend growth and a rebound in food prices, we expect FY27 headline inflation to average 4%,” said Mishra.
The Axis Bank report also noted that the significant and persistent divergence between food and core inflation over the past three years has reignited debate over whether the MPC’s headline inflation target remains appropriate.
“Until the law changes, the debate is inconsequential. However, we note that while core and food inflation trends may diverge over short time periods, over longer periods, they move together,” he said in the note cited earlier.
In August, the RBI initiated a consultation process on whether monetary policy should track headline inflation or core inflation, which excludes fuel and energy price impacts.
The central bank also released a discussion paper on its inflation-targeting framework seven months before the existing framework comes up for renewal. The framework, reviewed every five years, was last set in 2021 at 4% with a tolerance band of +/-2%, following consultations between the government and the RBI.