New Delhi [India], January 6 : The Reserve Bank of India still has room for a further 50 basis points (bps) cut in policy rates in 2026, following bumper rate cuts of 125 bps in 2025, according to a report by IIFL Capital.
The report highlighted that the gap between the repo rate and core CPI inflation remains elevated, providing space for additional monetary easing. The delta between the repo rate and core CPI is currently at 2.8 percentage points, compared to an average of 1.1 percentage points over the last seven years, indicating scope for further rate cuts in India.
It stated "There is room for more cuts (50bps), given that repo minus core inflation is well above its historical avg., and inflation is low".
The report added that monetary easing, along with continued deregulation, should lead to growth acceleration, with banks expected to outperform as credit conditions improve.
The Reserve Bank of India in December announced a 25 basis points reduction in the policy repo rate, bringing it down to 5.25 per cent. In the entire year 2025, the RBI announced a reduction of 125 bps.
India's GDP growth is expected to accelerate in 2026, driven by a combination of economic reforms and the cumulative impact of RBI rate cuts implemented so far. The report noted that there is room for more easing, as the repo rate minus core inflation remains well above its historical average.
While global monetary tailwinds are expected to be limited, domestic factors are likely to play a larger role in supporting growth.
According to the report, free trade agreements, especially with the European Union, and export-oriented foreign direct investment supported by the competitiveness of the Indian rupee, are expected to contribute positively.
Capital expenditure is projected to revive in the second half of FY27, adding further momentum to economic activity.
On the equity market outlook, the report said that valuation multiples at around 20.4 times are broadly in line with levels seen a year ago.
However, the chances of earnings upgrades are now brighter, and Nifty is expected to deliver returns of around 15 per cent from current levels. Small-cap stocks are also expected to catch up in performance, albeit with a lag.
The report further noted that 2026 is likely to be another year marked by reforms, deregulation and ease of doing business, supporting GDP acceleration.
Inflation risks are seen as minimal, as crude oil prices, which are well correlated with India's CPI inflation, are expected to remain around USD 65 and could be lower if Venezuela's crude infrastructure improves.
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