RBI May Cut Rate By 25 Bps On Wednesday, Says Experts

The Reserve Bank is likely to cut key interest rates again by up to 25 basis points this week, as lower inflation provides support for an accommodative monetary policy stance, and there is a pressing need to stimulate growth at a time when the reciprocal tariffs announced by the US is posing a challenge to the global economy.

In February, the RBI's Monetary Policy Committee, headed by Governor Sanjay Malhotra, slashed the repo rate by 25 basis points to 6.25 per cent. It was the first reduction since May 2020 and the first revision after two-and-a-half years.

The 54th meeting of the MPC, the rate-setting panel, is scheduled to start deliberations on April 7, and the decision will be announced on April 9.

The Reserve Bank of India (RBI) has kept the repo rate (short-term lending rate) unchanged at 6.5 per cent since February 2023. The last time the RBI reduced the rate was during the Covid times (May 2020), and thereafter, it was gradually raised to 6.5 per cent.

Bank of Baroda Chief Economist Madan Sabnavis said the credit policy to be announced this week will come at a time when several things are happening around the world and within the economy.

The new round of tariffs imposed by the US would have some impact on growth prospects and the currency which is something that the MPC will have to consider beyond the normal assessment of the state of the economy, he said.

"While it does look like conditions are rather clear for another 25 bps cut in repo rate this time with the inflation prospects being benign and liquidity having settled down, it is also expected that the stance will change to accommodative, meaning...that there could be more rate cuts in the offing during the course of the year," Sabnavis said.

US President Donald Trump on April 2 announced reciprocal tariffs ranging 11-49 per cent on about 60 countries, including India and China. It will come into effect from April 9.

There are challenges and opportunities for India as many of its competitor countries in exports, such as China Vietnam, Bangladesh, Cambodia and Thailand, face higher duties, according to experts.

Rating agency Icra also expects the MPC to cut rates by 25 bps in its upcoming meeting while maintaining a neutral stance.

"While the Central Bank's liquidity interventions are likely to continue with the target of offsetting the upcoming drain arising from the unwinding of the short positions in its forward book and the maturity of long tenor VRRs (Variable Rate Repo), we do not expect any major announcements around liquidity injections, such as a CRR cut in the MPC meeting," it said.

The recent announcements of liquidity injections are likely intended to nudge a faster transmission of rates, Icra added.

Meanwhile, industry body Assocham suggested that the forthcoming monetary policy should adopt a wait-and-watch stance rather than go in for a rate cut at this stage.

"The RBI has recently injected liquidity into the market through various measures...We need to be patient for these measures to have an impact on capex growth and consumption. Given this backdrop, we believe that the RBI is expected to hold rates steady during this policy cycle," said Assocham President Sanjay Nayar.

He said despite challenges on the external front, the Indian economy is expected to remain on a firm footing in the new fiscal. GDP growth near about 6.7 per cent for the FY26 is a reasonable expectation while retail inflation is likely to remain under check.

Retail inflation slipped to seven-month low of 3.61 per cent in February mainly due to easing prices of vegetables, eggs, and other protein-rich items, creating space for the RBI to go for another cut in interest rate next month.

The consumer price index-based retail inflation was at 4.26 per cent in January and 5.09 per cent in February 2024. The previous low was witnessed in July.

Pradeep Aggarwal, founder and Chairman, Signature Global (India) Ltd, said the central bank is anticipated to reduce the repo rate by 25 basis points, bringing it down to 6 per cent to stimulate consumption and driving economic growth.

"A lower policy rate serves as a catalyst for increased borrowing, encouraging more individuals to invest in home purchases, thereby boosting demand in the housing market," he opined.

However, the actual impact of this rate cut will largely depend on how effectively and swiftly commercial banks transmit the RBI's policy decision to borrowers, Aggarwal said.

Besides the RBI Governor, the MPC has two senior central bank officials and three persons appointed by the government.