The monetary policy committee (MPC) of the Reserve Bank of India (RBI) will most likely opt for a rate cut in its April policy review, even as liquidity situation in the banking system has improved, in order to support growth which may be facing downward risk due to the tariff impact, economists have said.
The surplus liquidity with banks is expected to help in faster and effective transmission of rate cut. Banks, burdened with high deposit cost, have been unable to pass on rate cuts effectively due to tighter liquidity in the banking system, hence necessitating a cut, say experts.
“Rate cuts are still needed to bring down the cost of credit, especially as inflation has fallen below the 4% target and growth risks are clearly to the downside, especially after tariff announcements,” said Dhiraj Nim, Economist/FX Strategist at ANZ Research.
India has been facing challenges to growth - despite a rebound in the third quarter of the financial year 2024-25 – which have now been exacerbated by the latest round of reciprocal tariffs.
“The reciprocal tariff imposed by President Trump may dampen India's external demand. With GDP growth already slowing, this could further strain economic performance. By maintaining surplus liquidity and ensuring robust credit flow, the RBI aims to stabilize financial markets and shield the economy from global uncertainties, such as trade tensions,” said Abhishek Bisen, Head-Fixed Income, Kotak Mahindra AMC.
Economist said a rate cut will help sectors like SMEs and housing benefit, as the cost of borrowing would ease. “Rate cut will ensure a smooth transmission of monetary policy signals. Repo linked loans rates will come down and sectors like SMEs and housing will benefit as borrowings turn less costly. This will give a boost to economic growth. For instance, SME contributes to exports and employment generation,” said Madhavankutty G, Group Chief Economist at Canara Bank.
On March 28, Moneycontrol’s poll of 21 economists, treasury heads and fund managers said that is likely to cut repo rate by 25 basis points (bps) in the upcoming monetary policy on April 9.
In the last few days, the liquidity in the banking system has turned positive due to active management by the RBI via daily variable rate repo (VRR) auctions, normal or long tenure VRR auctions, open market operations (OMO) purchases of government securities, and USD/INR Buy/Sell swap auction. The liquidity in the banking system has also improved due to government’s month-end spending on account of salaries, pensions and other expenditure.
“The RBI will need to ensure sufficient liquidity so that medium term interest rates (lending and deposit) rates also fall in line with the policy rate. To that extent, whenever needed, the RBI will not shy away from liquidity injection,” ANZ Research’s Dhiraj Nim said.
Currently, the liquidity in the banking system is estimated to be in surplus of around Rs 1.93 lakh crore.
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