How much easing could Reserve Bank of India signal in the April MPC?

The Reserve Bank of India (RBI) has embarked on policy easing from October 2024 through a combination of stance change, rate cut, liquidity easing, and exchange rate flexibility. The April monetary policy committee (MPC) is likely to accelerate this process as the risks around growth and inflation have materially shifted in a rapidly evolving global environment. 

To start with, growth and inflation forecasts will be in focus as the RBI will also publish their Monetary Policy Report (MPR) along with the MPC statement. Our estimate is that the direct gross domestic product (GDP) growth impact of the announced tariffs (if sustained) could be 40 basis points (bps) for FY26. It is likely that the RBI will lower its FY26 GDP growth forecast (6.7 per cent) by 20–40 bps on the back of these significant global developments. There is also a scope for the RBI to reduce its FY26 headline CPI forecast (4.2 per cent) by about 20 bps. 

This changing growth inflation dynamics make us more confident that the RBI will deliver a 25-bp rate cut in the April policy. This would be an appropriate risk minimisation strategy on the face of larger downside risks to growth compared to much lower upside risk to inflation. It is also likely that the RBI will emphasise that the growth objective supersedes the inflation objective in the near-term — a statement made in the February 2025 policy itself. A 50-bp cut might be considered if the financial stability angle dominates the MPC decision; but at the same time, it might want to avoid a signal that the economy is facing too many headwinds. We will assign only a small probability of a 50-bp cut in the April meeting as the immediate focus should be on creating the right preconditions for better transmission of monetary easing. 

In our view, a stance change from “Neutral” to “Accommod­ative” would be appropriate at this juncture as it will provide the required clarity for transmission of rate cuts to lower deposit and lending rates. Given the outlook on growth/ inflation/exchange rat­e­s, it is unlikely that the RBI will have to consider the possibility of its next move being a hike. Hence, even while there are lots of global uncertainties, the sta­nce change makes sense to us. 

We are also raising the extent of anticipated rate cuts in this cycle to 100 bps (75 bps earlier). This would likely take the real policy rate very close to neutral and then depending upon the actual impact of these tariff changes on growth, the RBI can decide on whether to bring policy rates below the neutral level too. 

The RBI’s large liquidity operations have pushed both durable and frictional liquidity into surplus. There is no immediate requirement for announ­c­ements about liquidity injection on the policy day since the market indicators of liquidity stress have also normalised. However, it is likely that the RBI will reiterate its commitment to keep liquidity ample through this tumultuous period for both better transmission of monetary policy and mitigating any risks to financial stability. April monetary policy would be the right platform to start arresting the negative spillover from global events with a firm and steady approach.  

The writer is managing director and chief economist, India, Citigroup Global Markets