No Interest Rate Cut Anticipated in RBI's February Review or Throughout FY26, Says Axis Bank Economist

The Reserve Bank of India (RBI) is unlikely to reduce interest rates in the upcoming policy review or throughout FY26 due to persistent inflation, according to a senior economist. Neelkanth Mishra, Axis Bank's chief economist and a part-time member of the Economic Advisory Council to the Prime Minister, noted that even with a change in leadership at the RBI, the institution's strong capabilities will maintain its current course.

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Inflation and Interest Rates

Mishra highlighted that inflation is expected to average 4.5% in FY26. He mentioned that except for the third quarter of FY26, where inflation might hit the RBI's 4% target due to a higher base, it will likely remain between 4.5-5% until the end of FY26. This leaves little room for any rate cuts. He also stated that a 0.50% cut in key rates would not significantly boost growth, emphasizing that rate cuts should be impactful.

Economic Growth Outlook

Contrary to some economists who see a dip in trend growth due to GDP growth falling to 5.4%, Mishra believes the trend growth remains at 7%. He expects this level to be achieved in FY26 following a 6.6% growth in FY25. Mishra attributed the slowdown in growth to unintended tightening by fiscal and monetary authorities, including reduced capital expenditure by the Centre and certain regulatory actions by the RBI.

Investment and Corporate Sector

Mishra pointed out that investment activity, rather than consumption, will drive economic growth. He noted that high utilisation levels across various sectors indicate sufficient appetite within the corporate sector for capacity expansion. This suggests that companies are ready to invest more as they reach higher production levels.

State Cash Transfers and Currency Management

Cash transfers by states to women are projected to increase from Rs 2 lakh crore in FY25 to Rs 2.5 lakh crore in FY26. Mishra mentioned that states like Bihar, which faces upcoming elections, might adopt similar measures. On currency management, he advocated for limited RBI interventions, noting the rupee's stability among peers and predicting it could depreciate further to Rs 86.5 per dollar by the end of FY26.

The economic outlook suggests cautious optimism with investment-led growth expected despite inflationary pressures limiting monetary policy flexibility. The corporate sector's readiness for expansion and increased state cash transfers could support this growth trajectory.