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Fed Rate Cuts End 2025: Why RBI May Settle at 5% in 2026

The US Federal Reserve has wrapped up the year with another interest rate reduction. This ongoing easing cycle has significant implications for India's monetary policy path. An economist from Bank of Baroda forecasts that the RBI's key rate will eventually settle at 5% by 2026. This outlook considers the maintained interest rate differential with the US and its impact on foreign investment flows.

Key Points: BoB Economist Predicts RBI 5% Rate in 2026 After Fed Cuts

  • US Fed ends 2025 with a third consecutive cut, lowering rates amid labor market weakness
  • BoB economist predicts RBI's repo rate will converge to 5% in Calendar Year 2026
  • Policy rate differential with US has supported FPI flows but rupee volatility poses a risk
  • RBI recently cut repo rate to 5.25% with a unanimous MPC vote and neutral stance
2 min read

As US Fed ends year with another rate cut, BoB Economist predict RBI to settle at 5% in CY26

As the US Fed cuts rates again, BoB's Dipanwita Mazumdar forecasts India's RBI repo rate to settle at 5% in CY26, analyzing policy differentials and FPI flows.

"If we go by the Fed fund rate long-term projections... we expect terminal rate of RBI to settle at 5% at around the same time. - Dipanwita Mazumdar, BoB Economist"

New Delhi December 11

The US Federal Reserve ended the year with its third consecutive interest rate cut, lowering the federal funds rate to 3.50%-3.75%.

The move to bring cumulative cuts in 2025 to 75 basis points comes amid persistent weakness in labour market indicators and continued uncertainty caused by the US government shutdown, which has restricted the flow of fresh economic data.

For India, the Fed's stance carries important implications, particularly in the context of currency volatility and interest-rate differentials.

The BoB Economist Dipanwita Mazumdar expected India's Reserve Bank of India (RBI) to settle at 5% repo rate in the Calendar Year 2026.

"If we go by the Fed fund rate long-term projections, there is expectation of another 25bps cut in CY26 and we expect terminal rate of RBI to settle at 5% at around the same time. Thus, convergence to mean reversions levels might see deferment in the near term and policy differential will be largely maintained at this level," she highlighted.

"The policy rate differential between India and US has largely been contained due to sharper pace of rate cut by RBI compared to the US. The yield differential has also mirrored the same trend as policy rate differential. This was supportive of FPI flows in the initial months," said Mazumdar.

"However, the volatility of rupee currently has had an impact on flows of late. Going forward, we expect the policy rate differential between India and US to be maintained at the current level," she added.

The report further said the higher yield differential between India and US in the near term will be supportive of FPI flows and hence is expected to provide currency some support. Inflation differential will also be tilted in favour of India as domestic food prices are largely contained.

The Reserve Bank of India (RBI) l;ast week reduced the repo rate to 5.25% from earlier 5.50%, with the Monetary Policy Committee (MPC) voting unanimously in favour while retaining a neutral stance.

The cash reserve ratio (CRR) remains unchanged at 3%, and the standing facility rate has been lowered to 5% from 5.25%.

- ANI

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Reader Comments

P
Priya S
As someone with a home loan, I'm all for lower rates! But I worry about my FD returns. The RBI has a tough job balancing borrower happiness and saver interests. Let's see how this plays out.
V
Vikram M
Maintaining the rate differential is key for attracting foreign investment. The rupee volatility mentioned is a real concern though. Strong FPI flows can boost our markets, so hopefully the prediction holds.
S
Sarah B
Interesting to see the global linkages. The US shutdown causing data issues shows how interconnected economies are now. India's position seems relatively stable, which is promising.
R
Rohit P
All this talk of rates and differentials... but will lower rates actually lead to cheaper loans for small businesses? That's the real test. Sometimes banks are slow to pass on the benefits.
D
Dipankar L
With all due respect to the economist, predicting 2026 is a bit of a crystal ball gaze. So much can change - monsoon, oil prices, global shocks. The RBI should stay flexible and not lock into a long-term target.
A
Ananya R
Glad to see food inflation is contained. That's a major relief for household budgets. If that remains stable, the RBI will have more room to support growth. Fingers crossed for good monso

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