RBI May Cut Rates Later in FY26 as Cooling Inflation Opens Door for More Liquidity Support

The Reserve Bank of India (RBI) could resume rate cuts after a short pause, as the latter half of FY2025-26 may call for enhanced liquidity in the system, according to a recent analysis from Angel One’s Ionic Wealth report.

With inflation projections now more controlled, the RBI has revised its FY26 inflation outlook downward to 3.7%. For Q1 of FY26, inflation is expected to hover around 2.9%, which aligns closely with the average figures recorded for April and May.

We maintain our stance that a further rate easing is on the horizon following a pause, and additional liquidity measures will likely be needed in the second half of the fiscal year,” the report stated.

This consistent disinflation, particularly in food prices, may give the central bank more flexibility to prioritize growth without inflationary concerns dominating policy decisions. However, the report warned that external risks — including global geopolitical tensions and trade-related uncertainties — could still impact inflation trends via imported cost pressures.

The sharp drop in food inflation was driven largely by a substantial fall in vegetable prices, which plunged 13.7% year-on-year. Pulses too saw a decline of 8.2%, aided by a favorable base effect. Meanwhile, the pace of cereal inflation eased to 4.7% from 5.4% the previous month.

The moderation in food prices is credited to strong supply-side support, thanks to a healthy rabi harvest and promising sowing conditions for the upcoming kharif season.

As the macroeconomic environment evolves, all eyes remain on the RBI’s next move — with the central bank likely to pivot back to growth-focused measures if inflation continues its downward trend.