RBI's MPC slashes repo rate once again, raises hope for more such cuts

An 'accommodative' stance effectively means that, absent any further shocks, the MPC is considering only two options - rate cut or a pause

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) unanimously reduced the policy repo rate by another 25 basis points (bps) in its three-day meeting ended April 9 — in its second successive 25-bp cut. While a lowering of the rate was widely expected, the unanimous change in stance from ‘neutral’ to ‘accommodative’ took us by surprise. After all, as recently as in the February 7 policy meeting, the RBI governor had justified keeping a ‘neutral’ stance on account of excessive volatility in global financial markets, and global trade uncertainties. Given that such uncertainties had only heightened further since, the change in stance was indeed unexpected. 

An ‘accommodative’ stance effectively means, in the absence of any further shocks, the MPC is considering only two options – a rate cut or a pause. The governor went to great lengths to clarify that the stance should thus be seen as a guidance of policy rate path, and not be directly associated with liquidity conditions. 

After India was hit by harsher US ‘reciprocal tariffs’ than expected, we had expected the RBI to revise down its growth and inflation forecasts, and so it did. Incorporating the likely impact of global trade and policy uncertainties, the RBI MPC revised down its real gross domestic product (GDP) growth and consumer price index (CPI) -based inflation estimates for 2025-26 — both by 20 bps to 6.5 per cent and 4.0 per cent, respectively.  

The MPC noted that inflation was currently below target, supported by a sharp fall in food prices, and the inflation outlook was promising, given likely robust kharif arrivals and lower crude oil prices. Accordingly, the RBI lowered its 2025-26 inflation forecast to 4 per cent from 4.2 per cent earlier. On growth, the MPC noted that the global outlook remained challenging and cited “trade disruptions” as the sole factor posing downside risks to India’s growth. It commensurately lowered its 2025-26 real GDP growth estimate to 6.5 per cent from 6.7 per cent earlier. 

Moving on to liquidity, we are convinced that the RBI intended to keep liquidity in sufficient surplus, roughly to the tune of 1 per cent of net demand and time liabilities (NDTL) — that is, ₹2.25 trillion). While the governor did not announce any new liquidity measures, he reiterated that the RBI was committed to taking any appropriate measures to ensure sufficient liquidity in the system. He also acknowledged a narrowing of the gap between the weighted average call rate and the policy repo rate as a reflection of improved liquidity conditions. 

Lastly, all eyes were on the RBI’s assessment of tariffs and the likely impact on India. While the situation is unfolding by the day, it is clear that the uncertainty in itself is dampening growth. As we write, the impact of relative tariffs, the import-export demand elasticity and impending policy measures are still not fully known. But what we do know is that trade friction will dent global growth and spill over to domestic growth through the net export channel.  The impact on inflation is less straightforward. While heightened uncertainty might lead to currency pressure and add to imported inflation, the likely slowdown in global growth could result in lower commodity prices, offering some respite to the domestic inflation trajectory. 

Given the backdrop of benign inflation and moderate growth outlook domestically, the RBI MPC proceeded with another cut. As CPI-based inflation aligns with the target and growth faces headwinds from global uncertainty, we expect two more cuts by the MPC in 2025. 

The author is India chief economist at Barclays