India may witness another policy rate cut before the end of the year, supported by the government's recent GST simplification measures and a broader phase of domestic regulatory easing, according to a report. The analysis suggests that the worst phase of fiscal consolidation may now be over, paving the way for a gradual recovery in credit demand.
"We expect an additional policy rate cut before year-end, and the recent GST simplification signals that peak fiscal consolidation is behind us. We expect this, along with domestic regulatory easing, to foster a gradual recovery in credit demand," the report stated.
RBI Maintains Repo Rate at 5.5%
The report comes shortly after the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 5.5%, while maintaining a neutral stance on monetary policy.
According to economists, the RBI's decision to hold rates reflects a cautious approach amid mixed economic indicators - resilient domestic demand on one hand and external headwinds on the other.
The report noted that the RBI's recent liquidity management and policy measures should ease supply-side credit conditions, though the pace of incremental lending will depend largely on overall economic demand.
External Challenges Still Loom
Despite improving domestic conditions, the report cautioned that external challenges continue to weigh on India's outlook. Among these are tighter U.S. immigration rules for H-1B visa holders, which impact the Indian IT sector and higher U.S. import tariffs of up to 50% on Indian goods, potentially dampening export momentum.
"These factors could temper credit demand alongside broader macro uncertainty," the report said, emphasizing the need for supportive policy measures to sustain growth.
GST Rationalisation and Monsoon Boost Growth Outlook
The report highlighted that the recent rationalisation of GST rates and favourable monsoon conditions have improved India's near-term growth prospects. In response, the RBI has revised its GDP growth projection for FY26 upwards, citing stronger rural demand and a pickup in consumption.
RBI Governor's latest monetary policy statement also opened the door for a potential 25 basis points rate cut later this year if inflation remains under control and global risks subside.
"The current macroeconomic conditions and outlook have created space for further policy easing to support growth," the policy statement noted.
Gradual Recovery in Credit Demand Expected
With improved liquidity, policy stability and reduced fiscal pressures, analysts believe credit growth could gradually accelerate in the coming quarters. Banking sector data already shows an uptick in lending to small and medium enterprises, agriculture and housing, indicating strengthening domestic demand.
Experts expect that the combined impact of lower borrowing costs, stable inflation, and GST simplification will encourage both consumer and corporate lending activity by early 2026.
Conclusion
The alignment of fiscal, monetary, and regulatory policies appears to be steering India toward a phase of moderate but sustainable growth. With another potential RBI rate cut on the horizon, and reforms such as GST simplification boosting consumption and compliance, the economy may soon witness a stronger revival in credit and investment momentum.
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