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Informist, Wednesday, Apr. 9, 2025

 

By Shubham Rana and Pratiksha

 

MUMBAI/NEW DELHI - The Reserve Bank of India's Monetary Policy Committee Wednesday lowered interest rates and loosened its policy stance to 'accommodative', with Governor Sanjay Malhotra hinting more policy support will be provided to support growth considering the worsening economic outlook. 

 

It is no surprise then that the result is increased expectations about rate cuts in the coming months; economists now see the RBI's rate cut cycle being much deeper, with some even predicting the repo rate could go as low as 5.00?ter the MPC cut it by 25 basis points to 6.00% on Wednesday.

 

By changing the stance, the Monetary Policy Committee acknowledged that easier financial conditions are needed to stimulate economic activity, with Malhotra clarifying that only a rate cut or a status quo would be considered under an ‘accommodative' stance assuming there are no "shocks".

 

According to HSBC economists, the RBI has given a "double assurance" that more rate cuts are coming. "It changed stance and also cut growth/inflation forecasts, both steps signalling more easing," they said in a note Wednesday.

 

There was more on the stance, which now does not provide guidance on the liquidity front. However, Malhotra promised the RBI will ensure there is sufficient liquidity to meet the needs of the economy and banking system, putting the ballpark surplus figure at around 1% of banks' net demand and time liabilities, which currently is equivalent to more than INR 2 trillion. The governor's comments helped turn the bond market around. The 10-year benchmark gilt yield, which had risen over 6 bps earlier in the day, went on to end 3 bps lower.

 

To be sure, the RBI has enough room to keep infusing durable liquidity without fanning inflation, with the central bank having previously said surplus liquidity of less than 1.5% of NDTL does not pose significant risks to inflation.

 

COOLING ECONOMIC FORECASTS

Inflation risks are decidedly on the decline for the Indian economy, with Malhotra and the RBI's forecasts exuding "greater confidence" that headline retail inflation will durably align with the 4.00% target over a 12-month horizon.

 

As per the latest projections, CPI inflation is now seen averaging 20 bps lower in 2025-26 (Apr-Mar) at 4.0%. The comfort on the inflation front was crucial as even the downgraded growth forecast of 6.5% for FY26 is seen optimistic. While Malhotra argued that the minor downward revision in the growth forecast was due to the impact of global trade and policy uncertainties and not domestic issues, economists are not convinced by the RBI's new number.

 

According to ANZ Bank India, the RBI's growth projections don't fully factor in the risks from the US' tariffs and the global growth slowdown. Meanwhile, Nomura thinks local factors are not as supportive, with weak urban consumption, uneven rural recovery, tepid private capex, stressed household balance sheets, and the negative credit impulse all dragging down growth even before the reciprocal tariffs became an issue. While ANZ sees growth slipping to 6.0% in FY26, Nomura has an even lower forecast of 5.8%.

 

However, Malhotra did acknowledge the downside risk to growth from the impact of US' reciprocal tariffs, adding that growth is more of a concern than inflation. The US has levied reciprocal tariffs against all major trading partners, which came into effect on Wednesday, including a 26% levy on India even as talks on a bilateral trade deal between New Delhi and Washington continue.

 

On the whole, the RBI and MPC have acted in consonance, drawing comfort from the inflation outlook and focusing firmly on growth in the backdrop of a turbulent global economic landscape. Analysts now widely expect the repo rate to be cut by 25 bps in both June and August policies. And if growth falters more than expected, further monetary easing could be on the cards. 

 

End

 

Edited by Vandana Hingorani

 

 

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