Rate Cut Expected as Growth Faces Downward Risks
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is widely expected to announce a rate cut in its upcoming April 9 policy review, despite the recent improvement in banking system liquidity. Economists suggest that with inflation falling below the 4 percent target and growth risks emerging due to tariff disruptions, monetary easing is necessary to support economic momentum.
A key factor behind the expected rate cut is the inability of banks to pass on lower interest rates to borrowers due to elevated deposit costs. The burden on financial institutions has made monetary transmission sluggish, necessitating a reduction in the policy rate to lower borrowing costs across sectors.
Observations:
RBI MPC is likely to cut the repo rate on April 9 despite easing liquidity conditions.
Tariff concerns and external trade uncertainties could weigh on economic growth.
High deposit costs have hindered the transmission of previous rate cuts, justifying further easing.
Surplus Liquidity Could Aid Faster Rate Cut Transmission
With the banking system now holding a liquidity surplus, economists argue that monetary easing will be more effective. Liquidity constraints in previous months had slowed down the impact of RBI’s policy rate decisions, limiting the benefits for businesses and consumers. The current surplus liquidity scenario, however, should enable a quicker and more effective reduction in lending rates.
Dhiraj Nim, Economist and FX Strategist at ANZ Research, emphasized the need for further rate cuts to bring down borrowing costs. “Rate cuts are still needed to reduce the cost of credit, especially as inflation remains below 4 percent and growth risks persist following tariff announcements,” he stated.
Liquidity Considerations:
Banking system liquidity has turned positive due to RBI interventions and government spending.
Surplus liquidity should ensure that lending rate reductions reach borrowers more efficiently.
A rate cut would encourage banks to lower interest rates for businesses and consumers.
Trade Tariffs Add to Growth Uncertainty
India’s economic growth had shown signs of recovery in the third quarter of FY25, but fresh concerns have arisen following the announcement of new reciprocal tariffs by U.S. President Donald Trump. The 27 percent tariff on Indian goods threatens to dampen external demand, adding further pressure on the country’s economic outlook.
Abhishek Bisen, Head of Fixed Income at Kotak Mahindra AMC, noted that these tariffs could have far-reaching effects. “The reciprocal tariff imposed by President Trump may weaken India’s external demand. With GDP growth already slowing, this could further strain economic performance. By maintaining surplus liquidity and ensuring robust credit flow, the RBI aims to stabilize financial markets and shield the economy from global uncertainties,” he explained.
Trade Policy Impact:
The 27% U.S. tariff on Indian goods could hurt external demand and slow GDP growth.
RBI’s liquidity measures aim to counterbalance the effects of trade disruptions.
Stable financial markets and credit availability are key to mitigating global economic shocks.
SMEs and Housing Sector Expected to Benefit from Lower Borrowing Costs
A potential rate cut is likely to provide significant relief to interest-sensitive sectors such as small and medium enterprises (SMEs) and the housing market. Economists believe that lower borrowing costs will encourage investment and expansion, ultimately supporting employment and domestic consumption.
Madhavankutty G, Group Chief Economist at Canara Bank, highlighted the importance of monetary easing for economic recovery. “A rate cut will ensure a smooth transmission of monetary policy signals. Repo-linked loan rates will come down, and sectors like SMEs and housing will benefit as borrowings become less costly. This will give a boost to economic growth. SMEs, in particular, contribute significantly to exports and job creation,” he said.
Sectoral Impact:
A repo rate cut would lower borrowing costs, supporting SMEs and the housing sector.
Lower interest rates could stimulate credit demand, boosting economic activity.
SMEs, which play a key role in exports and employment, stand to benefit the most.
Market Expectations: Analysts Anticipate a 25 Basis Point Cut
A recent Moneycontrol poll of 21 economists, treasury heads, and fund managers indicated a strong consensus that the RBI will opt for a 25 basis point (bps) repo rate cut in the upcoming policy meeting. Given that liquidity conditions have turned positive due to proactive central bank interventions, market participants expect the rate cut to be absorbed more efficiently into the financial system.
Recent liquidity-boosting measures by the RBI include daily variable rate repo (VRR) auctions, longer-tenure VRR operations, open market operations (OMO) purchases of government securities, and USD/INR buy/sell swap auctions. Additionally, the government’s month-end spending on salaries, pensions, and other expenditures has further improved the liquidity position of banks.
Market Expectations:
Moneycontrol poll suggests a 25 bps rate cut is the most likely scenario.
RBI’s active liquidity management has contributed to surplus banking system liquidity.
Recent monetary policy tools include VRR auctions, OMO purchases, and forex operations.
Ensuring Adequate Liquidity to Facilitate Rate Transmission
Although liquidity has improved, economists stress that the RBI must continue to ensure sufficient liquidity availability to align medium-term lending and deposit rates with policy rate adjustments. Failure to maintain adequate liquidity could limit the effectiveness of a rate cut, preventing lower borrowing costs from reaching businesses and consumers.
“The RBI will need to ensure sufficient liquidity so that medium-term interest rates—both lending and deposit rates—also fall in line with the policy rate. Whenever needed, the RBI will not hesitate to inject liquidity into the system,” Dhiraj Nim of ANZ Research stated.
Current estimates suggest that banking system liquidity is in surplus by approximately ₹1.93 lakh crore, creating a favorable environment for rate cut transmission.
Liquidity :
Banking system liquidity is currently in surplus by approximately ₹1.93 lakh crore.
RBI is expected to maintain adequate liquidity to facilitate effective rate transmission.
Further liquidity interventions may be implemented if market conditions require them.
