RBI Prepares for Potential Rate Cut Amid Liquidity Adjustments
The Reserve Bank of India (RBI) is gearing up for what could be the second consecutive policy rate cut in its upcoming Monetary Policy Committee (MPC) meeting on April 9. Following the February 7 rate cut, a series of economic indicators and liquidity measures suggest that another easing move is imminent. However, the key question remains—how deep will the cut be?
The RBI has been proactive in managing liquidity in the financial system. A significant shift in liquidity operations has led to a system-wide surplus, setting the stage for an effective transmission of monetary policy. Analysts believe that a policy rate cut amid a liquidity deficit would be ineffective, making the RBI’s liquidity infusion strategy a critical precursor to the next policy move.
Highlights:
The RBI is expected to announce another policy rate cut on April 9.
System-wide liquidity has turned into a surplus following RBI interventions.
The effectiveness of monetary easing depends on preemptive liquidity measures.
CPI Inflation Undershoots Estimates, Strengthening the Case for a Cut
Inflation has been a crucial factor shaping the RBI’s policy stance. February’s Consumer Price Index (CPI) inflation came in at 3.6 percent year-on-year (YoY), lower than consensus expectations. Although daily food price data and the recent transportation fare hike in Maharashtra suggest that CPI inflation could inch up to 3.7 percent YoY, the January-March average is still expected to be significantly below the MPC’s estimate.
With Q4FY25 CPI inflation likely to average at 3.9 percent—nearly 50 basis points lower than the MPC’s 4.4 percent estimate—there is clear room for further policy easing. Barclays projects an average CPI inflation of 4.7 percent for FY25 and a further decline to 4 percent in FY26, reinforcing the argument for additional rate cuts.
Observations:
February CPI inflation stood at 3.6% YoY, below market expectations.
Inflation for Q4FY25 is likely to average 3.9%, significantly below the MPC’s estimate.
CPI inflation for FY25 is projected at 4.7%, with a further decline to 4% in FY26.
GDP Growth Recovery Strengthens the Case for Policy Easing
On the growth front, India’s economic recovery remains in progress, though recent data suggests a modest pace. Real GDP growth for Q3FY25 improved to 6.2 percent YoY from 5.6 percent in the previous quarter, indicating that the economic trough is behind us. However, high-frequency indicators have been mixed, and Q4FY25 GDP growth is currently projected at 6.7 percent, bringing the full-year growth estimate to 6.2 percent—30 basis points below the RBI’s 6.5 percent forecast.
The combination of lower-than-expected inflation and slightly weaker-than-anticipated growth presents a compelling case for the RBI to continue its rate-cutting cycle. The central bank is likely to weigh its decisions carefully, considering global uncertainties and domestic demand trends.
Growth Insights:
Q3FY25 GDP growth improved to 6.2% YoY from 5.6%.
Q4FY25 GDP growth is projected at 6.7%, bringing full-year growth to 6.2%.
The GDP growth outlook is 30 basis points below the RBI’s 6.5% forecast.
How Much Will the RBI Cut? 25 Basis Points or a Non-Standard 35 bps?
Market participants widely expect the RBI to cut the repo rate by 25 basis points while maintaining a “neutral” policy stance. However, given the meaningful undershoot in inflation versus estimates, there is a strong case for a non-standard 35 basis point cut. The RBI has previously adopted non-standard rate changes in earlier policy cycles, making such a move plausible.
A 35 basis point cut would act as compensation for keeping the policy stance neutral amid continued global uncertainty. It would also signal that the RBI acknowledges the downside risks to both inflation and growth while maintaining flexibility in its approach to monetary easing.
Rate Cut Expectations:
Base case: A 25 basis point repo rate cut with a neutral stance.
Alternative scenario: A non-standard 35 basis point cut to address inflation undershoot.
Global uncertainties may influence the RBI’s decision-making process.
Policy Stance: Neutral vs. Accommodative
One of the key debates surrounding the RBI’s policy stance is whether it should maintain its “neutral” approach or shift to a more “accommodative” tone. The February rate cut, while welcomed, was accompanied by a neutral stance, which disappointed some market participants.
A neutral stance allows the RBI greater flexibility in deciding the pace of rate cuts, making it clear that not every MPC meeting will result in easing. Given ongoing global economic uncertainties, the central bank may continue with this approach in its April policy statement.
However, the RBI’s liquidity management actions suggest a more accommodative tilt. Since the beginning of the year, year-to-date liquidity infusion has surpassed ₹7.5 trillion, turning the liquidity deficit into a surplus. The recent ₹800 billion Open Market Operation (OMO) purchase, along with an expected bumper RBI dividend in May, will further boost liquidity.
Policy Stance Considerations:
The RBI is likely to maintain a “neutral” stance for policy flexibility.
A neutral stance suggests a pause in rate cuts is possible in future meetings.
Liquidity infusion measures hint at an accommodative bias despite an official neutral stance.
Liquidity Infusion and the Road Ahead for RBI’s Policy Framework
The RBI’s approach to liquidity management has seen a visible shift in recent months. With system-wide liquidity now in surplus, the central bank is ensuring that rate cuts, if implemented, translate effectively into lower borrowing costs for businesses and consumers.
Looking ahead, the RBI is expected to review its liquidity framework, though major changes may not be unveiled alongside the April policy statement. Durable liquidity infusion measures, however, are likely to remain a core part of the central bank’s strategy to support economic growth.
Liquidity Management Insights:
Year-to-date liquidity infusion has exceeded ₹7.5 trillion.
OMO purchases and an upcoming RBI dividend will further enhance liquidity.
A formal liquidity framework review is expected later, but infusion measures are likely to continue.
