RBI MPC Preview: Status Quo To Continue, Quasi Rate Cut Could Be On The Anvil

The Reserve Bank of India's Monetary Policy Committee is expected to continue to cut the benchmark lending rate in April. The MPC will meet from April 7 to April 9.

This is shortly after US President Donald Trump announced the imposition of reciprocal tariffs.

Of the 25 economists polled by Bloomberg, 21 expect the MPC to maintain status quo for the eleventh straight meeting. The benchmark lending rate, or the repo rate, is expected to remain unchanged at 6.5%.

"Despite the GDP growth print being significantly weaker than RBI's expectations, we think primacy of inflation will prevail for now," Barclays said in a note. RBI Governor Shaktikanta Das has repeatedly argued for primacy of price stability to support sustained high growth in the medium term, said Shreya Sodhani and Amruta Ghare, economists at Barclays.

Elevated inflation makes a December rate cut unlikely, but there could be an explicit acknowledgement that growth needs support, too, stated a research note by Citi. "This would cement our February rate cut view." However, the RBI could consider a CRR cut in December, as a step toward easing, while also loosening recent pressure on banking system liquidity, the note said.

Gross Domestic Product grew 5.4% in the July-September quarter, led by slower growth across the industrial sector and compared to 6.7% in the April-June quarter. Gross Value Added, which strips out indirect tax and subsidies, is estimated to have grown 5.6%, compared to 6.8% in the preceding quarter.

Alongside slower growth in industrial GVA led by manufacturing, private consumption, capex saw slower growth compared to the first quarter, as per expenditure wise trends.

The lower-than-estimated GDP growth prompted economists across the board to lower GDP forecasts for the full year, despite expectations of a sequential uptick in the second half of the fiscal. The RBI, too, is expected to lower its GDP growth forecast of 7.2% for the full fiscal.

CPI inflation breaching the upper limit of RBI's tolerance band in October is not a favourable backdrop for the MPC to commence the easing cycle, even as the growth outcome in Q2 FY25 disappointed MPC's expectation, Barclays said. "That said, we do not think the MPC's decision will be unanimous, and think it is likely that more than one member may dissent in the meeting."

High-frequency indicators for food prices show softer momentum almost across the board for nonperishables in November, though vegetable prices show only limited softening.

At the upcoming meet, the RBI could raise the third quarter inflation forecast upwards by about 80-100 basis points, but also trim fiscal 2025 GDP growth forecast by about 70 basis points.

"We think it makes sense to cut the CRR to improve the liquidity position in the money market, so that rate cut transmission happens swiftly, once the repo rate is cut," said Kaushik Das, chief economist at Deutsche Bank.