MPC meeting: RBI turns accommodative, signals future rate cuts despite liquidity concerns

The central bank is worried the reciprocal tariffs announced by the Trump government will impact growth more than inflation

By Neha Bothra Forbes India Staff

Published: Apr 9, 2025 04:12:06 PM IST

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RBI Governor Sanjay Malhotra
Image: Dhiraj Singh/Bloomberg via Getty Images RBI Governor Sanjay Malhotra Image: Dhiraj Singh/Bloomberg via Getty Images

The Reserve Bank of India’s (RBI) rate-setting panel unanimously voted to cut the repo rate by 25 basis points to 6 percent, and to change its stance to accommodative from neutral. Its message is loud and clear: Unless there are any big economic shocks, going forward, the six-member monetary policy committee (MPC) is considering only two options—a status-quo or a rate cut.

“The RBI changed its stance to accommodative from neutral, which was not on expected lines given the global background,” says Murthy Nagarajan, head-fixed income, Tata Asset Management. “RBI seems to be comfortable with currency depreciation in the coming months.”

The April policy announcement mainly seeks to cushion the impact of global spillovers on the domestic economy. The RBI marked down its GDP growth forecast for FY26 by 20 bps to 6.5 percent. In fact, it also reduced its growth estimates for the next four quarters by 10-30 basis points.

The central bank’s fear stem from three key factors. “First and foremost, uncertainty in itself dampens growth by affecting investment and spending decisions of businesses and households,” Governor Sanjay Malhotra said, as he announced the credit policy outcome on April 9. “Second, the dent on global growth due to trade frictions will impede domestic growth.”

Importantly, the higher tariffs announced by the US government will subdue exports. “There are, however, several known unknowns—the impact of relative tariffs, the elasticities of our export and import demand, and the policy measures adopted by the government, including the proposed Foreign Trade Agreement with the USA, to name a few,” the governor added. “These make the quantification of the adverse impact difficult.”

Nomura’s India and Asia (ex-Japan) chief economist Sonal Varma calls the 25 bps repo rate cut ‘dovish’ and is cautious about the growth projections. “Despite the growth forecast downgrade, the RBI’s FY26 GDP forecast of 6.5 percent still appears optimistic to us,” Varma argues. “We believe the combination of direct and indirect effects will result in GDP growth slowing more sharply to around 6 percent in FY26, and risks are skewed to the downside.”

Rajani Sinha, chief economist, CareEdge, is sceptical too. “We feel the growth could be lower at around 6.2 percent,” he says. “We estimate the direct impact of reciprocal tariff at around 0.2-0.3 percent of GDP and, to add to that, there will be indirect impact in the midst of heightened global uncertainties.”

If the MPC was worried about growth, it was more optimistic on the inflation front. The RBI revised its outlook for inflation downwards by 20 bps to 4 percent for the current financial year. It expects inflation at 3.6 percent in Q1 versus its earlier forecast of 4.5 percent. It sees inflationary pressures easing in the current calendar year with the headline inflation aligning with the target of 4 percent.

“The sharper-than expected decline in food inflation has given us comfort and confidence,” Malhotra said. “We remain vigilant to the possible risks from global uncertainties and weather disturbances.”

Yet there are upside and downside risks to inflation. The RBI believes that, on the upside, uncertainties may lead to possible currency pressures and imported inflation and, on the downside, a slowdown in global growth can further soften commodity and crude oil prices. “Overall, while global trade and policy uncertainties shall impede growth, its impact on domestic inflation, while requiring us to be vigilant, is not expected to be of high concern,” Malhotra stated.

Interestingly, the April policy outcome is against the backdrop of liquidity concerns in the banking system. The central bank was quick to point out that the policy stance should not be directly associated with the liquidity situation. While Malhotra agreed the monetary policy decision will have implications for liquidity management, he assured the central bank will undertake measures to keep liquidity in surplus to ensure speedy transmission of the rate cuts.

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“The RBI made it clear that they will provide liquidity in the banking system to support growth. Rate cuts in India are expected to be deeper to support growth as CPI inflation is below target of 4 percent for most of the year, as per RBI projections,” Nagarajan adds.

A slew of measures by the RBI, coupled with a pick-up in government spending in the second half of March, helped the system liquidity to improve to a surplus of Rs 1.5 lakh crore as on April 7.

Naveen Kulkarni, chief investment officer, Axis Securities PMS, highlights that unlike most rate-easing cycles—when CASA ratios tend to improve for banks—the trend was different in the previous quarter. “Systemic liquidity has been in deficit for the more significant part of the quarter, though it eased into surplus as banks exit Q4FY25,” he adds. “We expect the transmission on the Cost of Funds side to be slower versus the pace of transmission on the yields.”

Most economists have pencilled in two rounds of rate cuts in the current calendar year. “In the midst of global uncertainties and growth concerns, we expect further 50 bps rate cut in FY26,” says Sinha. “We do not rule out the possibility of the rate cut cycle being even deeper if the global trade war severely dents growth prospects.” Varma agrees: “We expect the rate cutting cycle to continue, with a 25 bps cut each in June and August.”

Nagarajan expects the terminal repo rate to go towards 5.25 levels from 6 percent at present.

Mahendra Kumar Jajoo, CIO—fixed income, Mirae Asset Investment Managers, believes the April policy clears the runway for positive momentum in fixed income markets, given the guidance for further cuts in forthcoming policies.

“Bond yields remained slightly higher immediately after policy announcement as the rates have eased significantly in the prelude but are expected to continue to soften going forward,” Jajoo adds. “It would seem that, in the current environment of uncertainty, the central bank is going to do the heavy-lifting yet again, as it did during Covid disruption.”

US President Donald Trump’s recently-announced trade tariff related measures have led to global turbulence. The US dollar has weakened, bond yields have softened, equity markets are in panic, and crude oil prices hover around over a three-year low of $57. Worldwide, central banks are navigating the choppy waters with caution. “The difficulty to extract signal from a noisy and uncertain environment poses challenges for policy making,” Malhotra concluded.