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The Reserve Bank of India (RBI) may find space to ease policy rates in the near term, as urban consumption remains soft and external demand conditions stay uncertain, according to a report by ICICI Bank. With the central bank maintaining a neutral stance and data-dependent approach, prevailing economic indicators could justify a 25 basis point rate cut as early as August.

“Monetary policy is forward looking and next year inflation prints are likely to move higher on the back of a low base, but weak urban and uncertain external demand (tariffs) has opened up room for easing,” the report stated.

Highlighting the broad-based decline in inflation, the report noted that prints for the first quarter of FY26 were 20 basis points below the Monetary Policy Committee’s (MPC) expectations. Forecasts for the second and third quarters are also expected to undershoot earlier estimates significantly.

“The undershoot is driven by food inflation, which at -1.1 per cent YoY is the weakest in over seven years,” the report noted. The sharp fall in vegetable prices—down 19 per cent year-on-year—played a key role. Additionally, prices of pulses, cereals, and spices have moderated, contributing to the overall decline in food inflation. ICICI Bank observed that the deceleration is widespread across food categories.

Rainfall, Sowing Trends Support Outlook

With rainfall levels above average so far, cereal production is expected to remain strong. Current sowing activity is already six per cent higher compared to the previous year, offering further support to a benign food inflation outlook in the near term.

“Given that the stance is neutral, which implies a data-dependent approach, a downward revision in inflation opens up room for further easing when growth is showing somewhat a downside bias or at least no reason for any upward revision. Hence, we believe this opens up policy space for an additional 25bps rate cut, taking the terminal rate to 5.25 per cent,” the report added.

ICICI Bank suggested that August could be an opportune time for the MPC to act. “When would the MPC cut the policy rate? We believe that August would be the appropriate time for the same, given the muted inflation scenario,” it said.

Exports And High-Frequency Data Show Mixed Signals

The report also pointed to weak global economic momentum affecting India’s export performance. While exports to the US remain resilient, shipments to other key markets are lackluster. High-frequency indicators also reflect a mixed growth picture—GST collections, for instance, declined to a 50-month low of 6.2 per cent year-on-year in June, indicating slowing momentum in domestic activity.