India set for a second consecutive rate cut in April amid global central bank caution on easing

Global Central Banks

Global central banks are expected to remain cautious on their rate actions in upcoming policies amid concerns over growth and inflation due to tariffs under Donald Trump's regime, economists said.

However, the Reserve Bank of India (RBI) may take comfort in opting for a rate cut in the April monetary policy due to easing inflation and growth bounceback in Q3FY25.

“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.

Pasricha said that the key concern is whether the growth impact from a potential US recession and tariff hikes will outweigh the inflationary impact of these tariffs. Higher metal prices may offset some of the inflationary relief from subdued oil prices, which are around $70 per barrel.

Last week, US Federal Reserve officials kept the benchmark interest rates steady for the second consecutive time, citing concerns that economic slowdown and high inflation could persist.

The Federal Open Market Committee voted last Wednesday to keep the benchmark federal funds rate in a range of 4.25 percent-4.5 percent, and said it would further slow the pace at which it is reducing its balance sheet.

Similarly, the Bank of England kept its key interest rate on hold at 4.5 percent, opting against a further cut despite stagnant UK economic growth and elevated inflation.

Sentiments around the globe have dampened due to concerns about stalling US economic growth after Donald Trump started a tariff war and continued to cut spending while shaking up decades-old geopolitical relationships.

“Meanwhile the Fed rate cut cycle is expected to be shallow due to the rising risk of the stagflationary environment in the US,” said Gaura Sengupta, Economist at IDFC First Bank.

Rate cuts ahead

In India, economists said that macroeconomic conditions are better placed due to lower inflation than the RBI’s medium-term target of 4 percent and a growth bounceback in the third quarter of this fiscal year, which may lead to a 25 basis point (bps) rate cut in the April monetary policy.

“We expect RBI to cut policy rates by 25 bps in April and 25 bps in June. The space to cut policy rates is derived from a moderation in inflation pressures,” Gupta said.

The RBI raised the repo rate by 250 basis points between May 2022 and February 2023. Since April 2023, the repo rate has been kept steady at 6.5 percent, in order to keep a check on inflation to bring it to the medium-term target of 4 percent.

The Indian economy had recovered in the December quarter to grow at 6.2 percent after sinking to a seven-quarter low of 5.6 percent in the July-September period, data released on February 28 showed.

The third-quarter growth number was a tad below the MC poll median of 6.3 percent but retained the full-year forecast of 6.5 percent, according to the second advance estimates. India’s growth had slipped to a near two-year low of 5.6 percent in the second quarter, with the government projecting 6.4 percent growth in the first advance estimate.

India's retail inflation fell to a seven-month low of 3.61 percent in February as food inflation eased further, according to data released by the government on March 12.

The decline in February marks only the third time this fiscal year that inflation has dipped below 4 percent.