India in a sweet spot: Falling oil, weak dollar to give RBI MPC breathing room

The RBI is expected to cut rates by 25 to 50 bps in its April policy meeting.

Global markets took a hit after US President Donald Trump announced a wave of reciprocal tariffs on over 180 countries, heightening fears of a recession and slowing growth. Wall Street saw a sharp selloff, and the pressure extended to US bond yields, the dollar index, and crude oil prices, all of which dropped significantly. With oil prices cooling off and the dollar losing strength, the Reserve Bank of India (RBI) finds itself in a more comfortable position to pursue interest rate cuts - both in the upcoming April policy meeting and possibly for the rest of the financial year.

According to consensus estimates, the central bank is expected to cut interest rates by 25 to 50 basis points (bps) in its upcoming meeting, with a higher likelihood placed on a 25 bps cut.

Anand Rathi, co-founder of MIRA Money, expects the RBI to reduce rates by 25 bps during its April policy meeting. This will mark the first monetary policy of FY26 and the second one under the current Governor Sanjay Malhotra, who previously lowered the benchmark rate by 25 bps in February.

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For the full financial year, Rathi anticipates a cumulative rate cut of 75 bps, citing easing food inflation as a supportive factor. “With the US 10-year treasury yields falling to their lowest levels in five months, crude oil prices dropping over 6 percent due to production hikes, and the US dollar index dipping below the 102 mark, the space for the RBI to continue with monetary easing has widened,” he said.

Falling oil prices bring down India’s import bill, help ease inflationary pressures, and improve the current account balance, thereby giving the RBI more room to prioritise economic growth. Simultaneously, a weakening dollar index often strengthens or stabilises the rupee, which, in turn, encourages capital inflows and dampens imported inflation.

Analysts at Acuité Ratings & Research also projected a 25 bps rate cut by the RBI. However, they cautioned that the markets may have already priced in this scenario. Beyond the rate decision, they believe that Governor Malhotra’s policy guidance will play a critical role in shaping market expectations for the remainder of the year.

In its February policy review, the RBI implemented its first repo rate cut in nearly five years, lowering the key policy rate by 25 bps to 6.25 percent. Since then, inflation has shown signs of moderation, with the February print coming in at a seven-month low of 3.6 percent. Projections for March suggest inflation could remain under the 4 percent-mark.

In parallel, the RBI has been actively managing liquidity in the banking system. Earlier in the quarter, liquidity conditions had tightened due to the central bank’s interventions in the foreign exchange market.

However, the situation has improved, thanks to liquidity injections. The RBI has infused nearly Rs 6.8 lakh crore through Open Market Operations (OMO), Variable Rate Repo (VRR) auctions, and forex swaps, narrowing the liquidity deficit from Rs 2 lakh crore in January to Rs 1.6 lakh crore in March.

Adding to the signs of an easing bias, India’s benchmark 10-year bond yields fell sharply to 6.5 percent on April 3, after the RBI announced it would purchase Rs 80,000 crore worth of government securities in April. A decline in bond yields typically reflects market expectations of lower interest rates going forward, although it doesn’t necessarily guarantee such a move.

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