Economists expect 25 bps rate cut in April meeting to support growth

Net liquidity in the banking system was in a deficit of Rs 1.09 trillion as of Monday, according to the latest data by RBI

There is an expectation among economists that the six-member monetary policy committee (MPC) of Reserve Bank of India will deliver another policy repo rate cut in April meeting to support growth with inflation trajectory trending down.

 

However, with banking system liquidity remaining in deficit, further cuts in policy rate may not get transmitted to lending rates that are not linked to an external benchmark, as resource mobilisation remains challenging.

 

Net liquidity in the banking system was in a deficit of ₹1.09 trillion as of Monday, according to the latest data by RBI. The net liquidity in the banking system has been in deficit mode for the past eleven consecutive weeks.

 

 

India’s gross domestic product (GDP) grew by 6.2 per cent in Q3FY25, compared to 5.6 per cent in Q2FY25, on the back of an improvement in consumer demand, higher export growth, and a rise in government expenditure.

 

According to economists at HDFC Bank, while Q3 GDP print shows that economic activity has inched up, it is still only a moderate increase and therefore they continue to expect the RBI to deliver another rate cut of 25bps in April 2025 in order to support growth.

 

In the February meeting, the six-member MPC reduced the policy repo rate by 25 bps to 6.25 per cent, against the backdrop of expected easing of inflation and slowing economic growth, marking the first interest rate reduction by the central bank in almost five years.

 

Radhika Rao, Executive Director & Senior Economist, DBS Bank said, “With FY25 trend growth expected to moderate to around 6 per cent from a revised 9 per cent in FY24, food disinflation setting in, and successive measures to ease macroprudential restrictions, policymakers have room to maintain a dovish stance. We expect a rate cut in April, with a likely shift towards an accommodative policy stance”.

 

Echoing similar views, UBS in its report said, fiscal and monetary support measures are being taken to strengthen the economic recovery and contain macro risks. We maintain that there is scope for further 50bps repo rate easing this cycle. “We also expect the RBI to take measures to improve interbank liquidity and maintain currency flexibility,” the report added.

 

Economists have cautioned that if RBI’s goal is to ease financial conditions, which will consequently lead to higher credit offtake it should focus on alleviating the persistent tight liquidity conditions rather than cutting the policy rate. 

 

RBI’s active intervention in the foreign exchange market has weighed on banking system liquidity. The RBI has been injecting liquidity into the system through various measures, including variable rate repo (VRR) auctions, open market operations (OMOs), and USD/INR buy-sell swap auctions.

 

“It is largely expected that the RBI will further cut rates in the upcoming MPC meeting in April to support growth. But with banking liquidity still remaining tight, policy transmission may not take effect unless the tightness eases,” said Madan Sabnavis, Chief Economist, Bank of Baroda, adding that RBI’s growth projection for the full year of 6.7 per cent looks on track, and further rate cuts may be to spur growth in the next financial year.

 

“At this point in time, it would make sense to hold and ease liquidity tightness so that there is transmission in lending rates and deposit rates, but RBI is likely to go for a cut to perhaps improve sentiments,” he said.

 

The six-member monetary policy committee will review the policy during 7-9 April.