Lower repo rate could push home, auto and corporate loan EMIs down further, boosting consumption and investment
New Delhi (Economy India): The Reserve Bank of India (RBI) may have room to cut interest rates by another 50 basis points (0.50%) in 2026, even after delivering a cumulative 125 basis points (1.25%) rate cut in 2025, according to a latest report by IIFL Capital. If the projection materialises, borrowing costs for households and businesses could ease further, providing a fresh boost to economic growth.
The report suggests that moderating inflation, supportive global commodity prices, and a widening gap between real interest rates and core inflation give the central bank sufficient technical and macroeconomic space to continue its accommodative stance.
Inflation–Interest Rate Gap Leaves Room for Further Easing
According to IIFL Capital, the gap between the current repo rate and core inflation stands at around 2.8%, significantly higher than the seven-year average of approximately 1.1%. This divergence indicates that real interest rates remain relatively elevated, strengthening the case for further rate reductions.
Economists note that as long as inflation remains under control, the RBI can prioritise growth without risking macroeconomic stability.
“From a historical and technical perspective, the current interest rate structure allows scope for further easing,” the report noted.
2025 Saw Aggressive Monetary Easing
In calendar year 2025, the RBI cut policy rates by a total of 125 basis points to stimulate economic momentum amid global uncertainty. The last cut of 25 basis points in December 2025 brought the repo rate down to 5.25%.
Market participants now expect the repo rate to fall closer to 5% or even below during 2026, depending on inflation trends and global financial conditions.
What It Means for Consumers and Borrowers
A further 50 bps rate cut in 2026 could have a direct and visible impact on households and businesses:
Key Benefits:
- Lower EMIs: Home loans, auto loans, and personal loans could become cheaper, easing household financial pressure
- Corporate borrowing: Reduced lending rates would help companies expand capacity and invest more aggressively
- Credit growth: Easier credit conditions may improve loan demand across sectors
However, the report also cautions that fixed deposit (FD) rates may decline modestly, affecting conservative savers.
Growth, Banking Sector and Credit Conditions
Lower interest rates, combined with ongoing government reforms, are expected to support GDP growth, improve bank balance sheets, and enhance overall credit conditions.
The report highlights that:
- Bank profitability could improve due to higher credit off-take
- Asset quality is likely to remain stable amid economic recovery
- Liquidity conditions should stay supportive
Additionally, expectations of crude oil prices hovering around USD 65 per barrel reduce inflationary risks, strengthening the argument for rate cuts.
Market Outlook: Equities May Benefit
Market experts believe that declining interest rates could be positive for equity markets, particularly rate-sensitive sectors such as banking, real estate, and automobiles.
According to analysts:
- The Nifty index could deliver up to 15% returns from current levels
- Banking stocks may benefit from stronger loan growth
- Realty stocks could see renewed momentum due to cheaper housing finance
- Select small-cap stocks may witness a recovery as liquidity improves
While the RBI will remain data-dependent, analysts broadly agree that monetary policy in 2026 is likely to remain growth-supportive, provided inflation stays within the central bank’s comfort zone.
A further 50 basis points cut could mark the final phase of the easing cycle, setting the stage for a sustained period of low borrowing costs aimed at accelerating consumption, investment, and long-term economic expansion.
(Economy India)
