RBI Policy Preview: Next Rate Cut Could Be On The Anvil

The Reserve Bank of India's Monetary Policy Committee is expected to cut the benchmark lending rate in April, even as it continues to frontload liquidity to ensure rate transmission.

The MPC will meet from April 7 to April 9.

This is shortly after US President Donald Trump announced retaliatory tariffs on India at 27% amidst concerns over slower global and domestic growth and continuing uncertainty.

All economists polled by Bloomberg expect the MPC to cut the rate, at least by 25 basis points.

"We expect the RBI to cut by another 25 basis points on April 9, while retaining the stance as neutral," said Aastha Gudwani, India chief economist at Barclays. "We see an outside chance that the MPC decides to ease by 35 basis points, acknowledging the sizable undershoot vs estimated CPI inflation.," she said, adding that downside risks to RBI's growth and inflation forecasts too remain.

CPI Inflation: Expected To Remain Low 

India's consumer price index-based inflation moderated to 3.61% in February from 4.26% in January. Food and beverage inflation eased to 3.84% in February from 5.68% in January. The decline was led by vegetable inflation, which contracted by 1.07% in February, after rising by 11.35% in the previous month. Inflation also fell below the central bank's target of 4% for the first time in six months, with expectations that it remained low in March.

"We are tracking March CPI inflation at 3.7% year-on-year, implying average CPI inflation during January-March at 3.9%, a sizable 50 basis points below the RBI MPC's 4.4% estimate," said Gudwani. FY25 average CPI inflation is estimated at 4.7% year-on-year, and it is estimated at 4% in FY26, she estimated. "Assuming a real rate of 1.5%, we forecast the terminal policy rate at 5.5% by December 2025."

GDP growth for Q3FY25 improved modestly to 6.2% year-on-year, up from 5.6% in Q2, suggesting that the trough is behind us. Still, high frequency data for Q4 remains mixed, with downside risks to the full year forecast.

Banking Liquidity: In Surplus

The front-loading of liquidity infusion by RBI indicates that intent is to make system liquidity a significant surplus on a consistent basis, to ensure transmission of rate cuts, Gaura Sengupta, chief economist at IDFC First Bank, said. System liquidity is likely to be surplus - 1% to 2% of NDTL in Q1FY26. Hence, the argument can be made to change the stance to accommodative from neutral in the April policy. However, given volatile global situation and uncertainly on Fed action, the RBI may choose to retain the neutral stance in April policy, she said.

Bond Yields: Softening Bias

Bond yields fell by nearly 20 basis points in March, plunging by over 50 basis points in FY25, its biggest drop in five years. Bond market participants anticipate the trend to continue amidst expectations of the next rate cut.