The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) began its three-day meeting on April 7, with the policy announcement scheduled for Wednesday, April 9. The central focus remains on whether the RBI will cut interest rates again, following its February move.
In the previous meeting, which marked Sanjay Malhotra’s debut as RBI Governor, the central bank reduced the repo rate by 25 basis points to 6.25%, the first such cut in nearly five years, while maintaining a “neutral” policy stance.
A Rate Cut Likely?
Market experts anticipate another 25 bps rate cut. Sankar Chakraborti, CEO of Acuit Ratings & Research, noted that with inflation easing and growth still lagging, the RBI is expected to continue supporting the economy through policy easing. He also stressed the importance of the RBI governor’s guidance on the extent of this rate-cutting cycle.
Inflation Eases Sharply
Retail inflation fell to 3.6% in February, the lowest in seven months, and comfortably below the RBI’s 4% medium-term target. The drop was largely driven by a sharp fall in food inflation, which declined from 9.7% in October 2024 to 3.8% in February 2025.
Core inflation also remained subdued, staying under 4%, indicating broad-based price stability. Nonetheless, risks remain in the form of a potentially poor monsoon and rising global commodity prices, which could stoke inflation.
Growth Recovery Still Fragile
India’s GDP grew by 6.2% in Q3 FY25, up from 5.6% in Q2, signaling early signs of recovery. However, the pace remains below India's long-term potential. Weak private sector investment continues to drag growth, as companies remain cautious despite the government’s push through public spending and easier credit.
Mixed Demand Signals
While rural demand is gradually picking up, urban consumption is yet to show a consistent upward trend. This has kept overall domestic demand on a shaky footing.
Global Trade Tensions Loom
Adding to the complexity is the return of global trade tensions, with U.S. President Donald Trump’s tariff threats affecting countries like India and Brazil. India already faces 26% tariffs on select goods, raising concerns over export performance and manufacturing momentum.
Liquidity Measures by RBI
The RBI has injected around Rs 6.8 lakh crore into the banking system since January through various instruments like Open Market Operations (OMOs), Variable Rate Repo (VRR) auctions, and forex swaps. This has narrowed the liquidity gap from Rs 2 lakh crore in January to Rs 1.6 lakh crore in March.
Still, liquidity remains tight, especially for NBFCs and small businesses, which rely heavily on bank credit.
External Factors at Play
If the U.S. Federal Reserve begins easing rates later this year, it could take pressure off the Indian rupee, giving the RBI more flexibility for further rate cuts. However, intensifying trade frictions could trigger foreign capital outflows, weakening the rupee and raising import costs.
Market Reactions and Sector Impact
Markets are largely pricing in a 25 bps rate cut. Narinder Wadhwa of SKI Capital said that the decision will impact several sectors, including banking, NBFCs, real estate, and auto, by lowering borrowing costs. He added that while a weaker rupee might benefit exporters like IT and pharma, it could make imports costlier, impacting inflation.
Wadhwa also suggested that the RBI might consider additional liquidity measures, such as a CRR cut or more OMOs, which could particularly help mid-cap and small-cap stocks, currently under pressure.
