April 2025 MPC meeting: Expectations of rate cut amid easing inflation, global economic uncertainty

Reserve Bank of India

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) will be announcing the outcome of its meeting on April 9. This will be the first monetary policy of FY26 and the second under current governor Sanjay Malhotra, who lowered the benchmark rate by 25 basis points (bps) in the February monetary policy. The current policy repo rate stands at 6.25 percent while the stance remains at “neutral”.

Real GDP growth for Q3FY25 stood at 6.20 percent, which while higher than 5.60 percent (revised from 5.40 percent) in the preceding three-month period, was markedly lower than in the third quarter of FY24, when it came in at 8.60 percent. This signifies a growth slowdown in the Indian economy. Furthermore, global markets are facing uncertainties with various tariff-related announcements by the US.  The likely impact on the Indian economic parameters such as exports and growth will remain uncertain for the time all these tariff and trade uncertainty take to settle. The outcome of the talks the Indian government is in with the US administration is likely to be known in near future and may have a bearing on the MPC decision.

The headline inflation data for February was 3.61 percent (a seven-month low), lower than 4.31 percent seen in January. The headline inflation has been falling since October 2024, when it was at 6.21 percent The fall in February was the effect of a decrease in food inflation, which stood at 3.75 percent (the lowest since May 2023) compared with 5.97 percent in January. Vegetable inflation dropped to negative (-1.07 percent) in February, for the first time in 20 months, falling from 11.35 percent in January. However, core inflation rose to 4.08 percent in February, crossing the 4.00 percent mark after 14 months, and increasing from 3.70 percent in January.

Liquidity in the banking system has been in deficit since mid-December 2024. The liquidity deficit peaked around Rs 3.3 lakh crore on January 23 and eased to Rs 2.26 lakh crore by March 18, and further to Rs 0.13 lakh crore on March 27. The RBI has taken various measures to infuse the long-term liquidity in the system in the last few weeks. It has conducted forex buy/sell swaps amounting to $25 billion and purchased government securities via open market operations worth Rs 2.83 lakh crores (scheduled in auction as well as from the market). Further, it has conducted long term variable repo rate (VRR) auctions of Rs 1.83 lakh crore (maturing in first seven days of April) in addition to its daily VRR. We expect liquidity measures from the RBI to continue in the early part of FY26 as well.

Interest rates seem to have peaked globally with several major economies following the rate cut path (Switzerland being the most recent one) with the exception of the Bank of Japan, which went for an increase in January to 0.50 percent. The Federal Open Market Committee did not change US rates in its last policy, while Summary of Economic Projections given by US Federal Reserve Board members and Federal Reserve Bank presidents continue to indicate a 50 bps rate cut each in CY25 and CY26.

Given the backdrop, we observe that the government is on the path of fiscal consolidation with a fiscal deficit target of 4.40 percent of GDP for FY26. Moreover, GDP growth has moderated in FY25  with uncertainty surrounding global trade policy after the regime change at the White House. Availability of liquidity in the system could play a crucial role in shaping the banking system and driving economic growth. Liquidity needs to be positive in a meaningful way for the rate cut transmission to happen, hence we need a change of stance from neutral to accommodative.

Considering all the factors, we expect the rate-setting panel of the MPC to cut the repo rate by 25 bps to 6.00 percent and to keep the stance unchanged at “neutral” in its April 2025 policy meeting. However, If the MPC wants to signal a dovish tone, we see some chance of the stance moving to" accommodative".

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