Change in stance to accommodative opens up possibility of further 50 bps repo rate cut over next six months

RBI Monetary Policy

By Abhishek Bisen, Head - Fixed Income, Kotak Mahindra AMC

The RBI’s Monetary Policy Committee (MPC) met for its 54th meeting in a time where the extreme events have become the order of the day and predicting the market moves even in fixed income became challenging task. Theory and reality were poles apart for example in uncertain time the US treasuries were seen as safe haven instead we saw fire sale in US bonds in matter of a day with volatilities in fixed income being equal or more than equities. When such events trigger, not only a common investor burns their fingers but finance market veterans also get caught on the wrong foot.

The MPC has unanimously voted to reduce the repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.00% with immediate effect. As a result, the standing deposit facility (SDF) rate reduced to 5.75%, and marginal standing facility (MSF) and bank rate to 6.25%. Moreover, the MPC decided to change the stance to “accommodative” from “neutral”.

The real GDP growth forecasted by RBI for FY2025-26 reduced to 6.50% from 6.70% projected in its last monetary policy in February 2025. The global environment has become volatile after the imposition of reciprocal tariff by Trump which has negatively impacted the financial markets globally. Global growth is likely to be impacted which may have bearing on the Indian growth also. However, as compared to the Asian and global peers, the impact on India is likely to be less as the economy is more domestic oriented.

India’s manufacturing PMI increased to an eight-month high at 58.1 in March 2025 improving from 56.3 in February 2025 (14-month low). The services PMI decreased marginally to 58.5 in Marh 2025 from 59.0 in February 2025, however remaining above the long-term average.

Related stories

Abhishek Bisen

Head - Fixed Income|Kotak Mahindra Asset Management Company

• 
  RBI MPC on October 1: Will RBI wait for tariff situation to resolve before acting on policy?
• 
  RBI likely to play it like a Test match: Repo rate cut unlikely in August policy meeting
• 
  Eye on RBI MPC: A 25 bps rate cut on cards as inflation eases, growth support seen intact

The RBI noted that the headline inflation is below the 4% medium-term target with a band of +/-2%. The headline inflation for February 2025 stood at 3.61% supported by declining food inflation. Moreover, we have seen that the crude oil prices falling sharply, and the Brent Crude oil is currently around $60 per barrel falling from around $90 per barrel a year ago. This is positive for India as it is a major importer of oil.

Considering normal monsoon going ahead, the headline inflation appears to be stable. The major risks associated with the food production is the climate related event. The RBI reduced the FY2025-26 forecast to 4.00% from 4.20%.

On liquidity front, though the RBI Governor did not announce any new liquidity measures, he reiterated in his statement that the RBI is committed to provide sufficient system liquidity. The average spread of weighted average call rate (WACR) over the repo rate softened indicating improving liquidity conditions. The system liquidity turned surplus towards the end of March 2025 (was deficit since mid-December 2024) and it further improved and stood at Rs 1.50 lakh crore surplus as on April 7, 2025. Just to recap, RBI has infused liquidity of close to Rs 8 lakh crore between December 2024 to March 2025 through various measures such as CRR cut, OMO purchase, forex buy/sell swap, long term VRR etc.

India’s foreign exchange reserve stood at $676 billion as on April 4, 2025 which is the highest level in five months. This is expected to provide import cover of approximately 11 months given the uncertain global environment.

Given the backdrop, we see that the imposition of tariff by Trump to over 180 countries has increased the uncertainty in global financial markets. US 10-year treasury rates are exhibiting volatility with upward movement of yield by ~ 50 bps in a matter of 2-3 days. In post MPC press conference, RBI Governor had almost sounded that’s he is saying we are there for whatever it takes which makes this a dovish stance meaning MPC will be either maintaining status quo or cut rate and reiterated that RBI will keep liquidity sufficient surplus at around 1% of NDTL.

Under neutral stance while RBI was cutting rates, the transmission was not full as markets were on tenterhooks of anytime reversal, however as the stance has been made accommodative opening up possibility of further repo rate cut by 50 bps over the next six months. This will help markets revive animal spirits and move free and transmit equal or probably more than what RBI has/will deliver in terms of repo rate cut. We expect 10-year G-sec to trade in the range of 6.40-6.50% and may drift further lower towards 6.25% range as global uncertainty settles and further cuts get delivered.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.