RBI Likely to Ease Rates as Inflation Moderates and Growth Rebounds
The Reserve Bank of India (RBI) is expected to implement a 25 basis points (bps) rate cut in April, marking the second consecutive cut, as macroeconomic conditions improve with inflation below the 4% target and economic growth bouncing back in the third quarter of FY25.
While global central banks remain cautious about rate cuts due to growth concerns and inflationary pressures, economists suggest that India is in a better position to lower borrowing costs compared to its global counterparts.
Global Central Banks Maintain a Cautious Stance on Rate Policy
Global central banks have been reluctant to ease monetary policy in response to economic uncertainties, particularly due to trade disruptions and tariff hikes initiated under Donald Trump’s administration.
“We do see central banks staying cautious given the high level of uncertainty, with policy flip-flops becoming regular under Trump 2.0,” said Kanika Pasricha, Chief Economic Advisor at Union Bank of India.
Global Policy Decisions:
The US Federal Reserve kept interest rates steady at 4.25%-4.5% for the second consecutive time, citing concerns that economic slowdown and high inflation could persist.
The Bank of England also held its key interest rate at 4.5%, opting against a cut despite stagnant UK economic growth and elevated inflation.
There is rising concern over stagflation in the US, with slowing growth and persistent price pressures affecting investor sentiment.
“The Fed’s rate cut cycle is expected to be shallow due to the rising risk of a stagflationary environment in the US,” noted Gaura Sengupta, Economist at IDFC First Bank.
Tariffs and Trade Disruptions Impact Economic Growth Projections
Concerns over the potential economic impact of US tariffs have added to the uncertainty in global financial markets. Economists remain divided on whether trade restrictions will hurt global growth more than they curb inflation.
“The key concern is whether the growth impact from a potential US recession and tariff hikes will outweigh the inflationary effect of these tariffs. Higher metal prices may offset some of the inflationary relief from subdued oil prices, which are currently around $70 per barrel,” added Pasricha.
The escalation of trade tensions and spending cuts by the US government have also dampened investor confidence globally, impacting market sentiment.
RBI Has Room for a Rate Cut Amidst Easing Inflation
Unlike its global peers, India’s economic conditions provide the RBI with flexibility to lower interest rates in its upcoming monetary policy review.
Economists argue that falling inflation and improving growth in India justify the rate cut expectations.
“We expect RBI to cut policy rates by 25 bps in April and another 25 bps in June. The space to cut policy rates is derived from a moderation in inflation pressures,” said Gupta, a leading economist.
Key Indicators Supporting Rate Cut Expectations:
Retail inflation dropped to a seven-month low of 3.61% in February, with food inflation easing further.
India’s GDP rebounded to 6.2% in Q3FY25, after sinking to a seven-quarter low of 5.6% in Q2FY25.
Inflation has remained below the RBI’s medium-term target of 4%, giving policymakers room to ease monetary policy.
India’s Growth Momentum Strengthens in the Third Quarter
The Indian economy showed a significant recovery in Q3FY25, with GDP growth rising to 6.2% from 5.6% in the previous quarter.
Although the third-quarter growth was slightly below analysts’ median forecast of 6.3%, it remained in line with the government’s full-year growth projection of 6.5%.
“India’s growth had slipped to a near two-year low of 5.6% in Q2FY25, but with the third-quarter rebound, we expect momentum to sustain in the coming months,” noted a senior economist from a leading financial institution.
RBI’s Policy Actions Over the Past Two Years:
Between May 2022 and February 2023, the RBI raised the repo rate by 250 bps to curb inflationary pressures.
Since April 2023, the repo rate has been held steady at 6.5%, with the RBI adopting a wait-and-watch approach to ensure inflation remains under control.
The expected rate cut in April 2025 could mark the beginning of a more accommodative monetary policy cycle.
Inflation Declines, Strengthening Case for Monetary Easing
India’s consumer price index (CPI) inflation fell to 3.61% in February, marking its lowest level in seven months. The drop was mainly due to a decline in food inflation, which had been a major contributor to price pressures in previous months.
“The decline in February marks only the third time this fiscal year that inflation has dipped below 4%,” according to government data released on March 12.
The RBI’s monetary policy stance has been heavily influenced by inflation trends, and with price stability improving, economists expect the central bank to begin its rate-cutting cycle in the coming months.
Market Expectations: What Lies Ahead for RBI’s Monetary Policy?
With inflation easing and economic growth stabilizing, market participants are pricing in two potential rate cuts in 2025, beginning in April.
While global uncertainties remain, India’s domestic conditions appear well-positioned for monetary easing, which could boost liquidity and support economic expansion.
As the RBI moves toward a more accommodative stance, the focus will remain on sustaining growth while keeping inflation in check—a balancing act that will define India’s monetary policy trajectory for the rest of the year.
