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The Reserve Bank of India (RBI) is widely anticipated to alter its monetary policy stance from neutral to accommodative, and concurrently reduce the repo rate by 25 basis points (bps) during its monetary policy committee (MPC) meeting scheduled for April 9th. This expected shift underscores the central bank's increasing prioritization of stimulating economic growth, particularly in the face of moderating inflation and prevailing global economic headwinds. The potential imposition of tariffs by the United States on imports from India presents a significant risk to economic growth, thereby intensifying expectations that the RBI will implement further measures to bolster the economy. The RBI had previously transitioned its monetary policy stance to 'neutral' from 'withdrawal of accommodation' in October of the preceding year. A primary impetus behind the anticipated change in stance is the RBI's desire to ensure the effective transmission of its past and potential future rate cuts by banks to borrowers. By adopting an accommodative stance, the RBI aims to signal to banks its comfort with lower interest rates and the maintenance of ample liquidity within the financial system. Such conditions of easy liquidity are designed to encourage banks to pass on the benefits of these rate cuts to borrowers, thereby stimulating economic activity. According to Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, the RBI's proactive liquidity easing measures strongly suggest a determined effort to facilitate smooth monetary transmission as it continues along its rate easing trajectory. Based on their estimates of muted fiscal year 2026 growth and a comfortable inflation trajectory, they continue to anticipate 25 bps rate cuts in both the April and June policies, accompanied by a shift in stance to accommodative. Furthermore, with global risks remaining elevated, there is an expectation of room for an additional 25-50 bps of rate cuts should the growth slowdown persist. The RBI has already been actively managing liquidity in recent months, reversing a deficit experienced during January, February, and March 2025 to achieve a surplus in the banking system. This proactive approach has involved a series of measures, including lowering the Cash Reserve Ratio (CRR), conducting daily variable rate repo operations, implementing long-term repo auctions, engaging in forex swaps, and undertaking Open Market Operations (OMO) purchases, all aimed at alleviating liquidity shortages. This proactive liquidity management strategy is widely regarded as a precursor to a formal change in stance, providing banks with the necessary funds to support increased lending at potentially lower interest rates. Liquidity surplus in the banking system crossed the 2 lakh crore mark last week, reaching 2.16 lakh crore on April 3rd, indicating the RBI's comfort with maintaining easy liquidity conditions.
Adding to the rationale for a potential rate cut and a shift in monetary policy stance are mounting concerns surrounding global economic growth prospects. The recent announcement of tariff hikes by the United States, under the leadership of Donald Trump, has heightened anxieties about a potential slowdown in global trade and overall economic activity. Such protectionist measures could negatively impact India's growth prospects, prompting the RBI to consider preemptive easing measures to cushion the domestic economy against these external shocks. The likely slowdown in economic growth stemming from the imposition of US tariffs has also opened the door for an additional reduction in the repo rate. Sakshi Gupta, principal economist at HDFC Bank, anticipates two consecutive rate cuts of 25 bps each in April and June 2025. Beyond these anticipated cuts, the possibility of a further rate reduction later in the year hinges on how global headwinds ultimately pan out. The RBI had previously lowered the repo rate by 25 basis points to 6.25% in February, marking its first rate cut in nearly five years. The prevailing domestic inflation scenario has provided the RBI with greater comfort in considering a shift towards accommodation. The Consumer Price Index (CPI) inflation has exhibited a moderating trend in recent months, falling comfortably within the RBI's target band of 2-6%. In February, CPI inflation declined to a seven-month low of 3.61 per cent. Retail inflation has averaged 3.9 per cent in the first quarter so far, remaining below the RBI's target of 4 per cent. This easing of inflationary pressures provides the central bank with greater flexibility to maneuver on the monetary policy front without facing the immediate threat of runaway inflation.
Radhika Rao, senior economist and executive director at DBS Bank, notes the implementation of policy easing measures across various fronts since February, coinciding with official growth estimates aligning towards an anticipated slowdown in economic momentum. She emphasizes that a strong move to boost liquidity suggests that the overall policy stance is clearly accommodative, with a specific focus on facilitating effective policy transmission. While recognizing the heightened levels of global uncertainties, she anticipates a broadening recovery supported by tax relief measures announced in the recent Budget, a pick-up in real incomes as inflation subsides, an improved composition of exports, the government's stepped-up capital expenditure (capex) disbursements, and early indications of stabilization in urban demand. The expected change in the RBI's monetary policy stance and the anticipated repo rate cut are driven by a combination of factors, including moderating inflation, concerns about global economic headwinds, and a desire to stimulate domestic economic growth. The RBI's proactive liquidity management and commitment to ensuring the effective transmission of rate cuts through the banking system are crucial elements of its strategy to support the Indian economy in a challenging global environment. The impact of US tariffs and other global uncertainties will likely play a significant role in shaping the RBI's future monetary policy decisions. The central bank's monitoring of CPI Inflation and the trajectory of economic growth will guide its responses in upcoming meetings.
Source: MPC may change stance, cut rate