RBI Monetary Policy: MPC On Track For More Rate Cuts; More Liquidity Measures In The Pipeline

India's Monetary Policy Committee, led by newly appointed RBI Governor Sanjay Malhotra, cut the benchmark repo rate by 25 basis points, marking the first change in the benchmark lending rate in two years and the first rate cut in nearly five years.

Post this cut, economists expect another rate cut at the MPC's next meet in April, even as the depth of the ongoing rate cut cycle will be dependent on GDP growth.

"We think that the RBI will carry through with further rate cuts in April and thereafter," said Indranil Pan, Chief Economist at Yes bank. However, this rate cut cycle may be shallow.

Importantly, a study by the RBI had indicated that the ideal real interest rate for the economy should be 100-150 basis points, Pan noted. With inflation forecast for FY26 at 4.2%, a 150 basis points real rate means that the repo rate can go down to 5.75%, he said, adding that the base case for the terminal repo rate would be at 5.75%, or at best at 5.5%.

A further rate cut of 25-50 basis points is expected in FY26, depending on how growth-inflation dynamics play out, Rajani Sinha, Chief Economist at CareEdge said. Global factors and their implications for the domestic economy will be critical for the RBI in FY26, she added. However, Aurodeep Nandi, India economist at Nomura, expects another 75 basis points of rate cuts in the pipeline this year. "We have been arguing for a while now that growth faces strong headwinds, underlying inflation is low and high policy rates have outlived their utility," he said.

"While market participants are disappointed with no new explicit announcement on liquidity measures, we reckon such announcements do not need to be announced on the MPC policy platform per se and can be undertaken as and when needed," Madhavi Arora, lead economist at Emkay said.

The January liquidity measures are yet to be completely implemented, and near-term system liquidity deficit, including durable liquidity, appears comfortable compared to January 2025 highs, she said. Policymakers may also want to keep sufficient tools in reserve and not use them all in one go, especially as global dynamics are very fluid and tricky, implying the need to ensure enough tools to react in times of stress, she added.

However, system liquidity will turn ugly to the tune of about Rs 2.5 trillion by end-March 2025, sans any additional liquidity measures.

This implies more measures are on the anvil if RBI finds this level of deficit uncomfortable for policy transmission, especially as the depth of the cut cycle is still arguable. "We expect more OMOs in primary/secondary markets, followed by VRRs and more FX swaps, especially as the RBI’s forward book is heavy with large near-term maturity," she added.