Context:
The Reserve Bank of India (RBI) is expected to enhance liquidity measures to ensure effective transmission of monetary policy amid global market turmoil triggered by US tariffs. Keeping overnight rates at or below the repo rate, facilitating quick rate transmission through liquidity tools.
Key Highlights:
- Rate Cut Expectations:
- The Monetary Policy Committee (MPC) is scheduled to announce its decision on Wednesday.
- A 25-basis point rate cut is widely expected, bringing the repo rate down to 6%.
- Global Market Fallout:
- The US imposed 26% tariffs on Indian imports, triggering concerns over India’s growth and inflation outlook.
- The move wiped off $2 trillion in global market cap, making it the worst tariff shock since 1930’s Smoot-Hawley Act.
- Liquidity Conditions:
- Current banking liquidity surplus stands at around ₹1 lakh crore, a sharp turnaround from recent deficits.
- RBI has injected ₹6.4 lakh crore in durable liquidity since December 2024, via:
- Forex swaps
- Open market bond purchases
- An additional ₹60,000 crore infusion is expected in the rest of April.
- Overnight Borrowing Trends:
- The Weighted Average Call Rate (WACR) was at 6.16%, 9 bps below the repo rate, indicating surplus liquidity.
- Transmission Efficiency Priority:
- Economists believe a further rate cut must be accompanied by smoother transmission, and liquidity support is crucial.
- Goldman Sachs: RBI to actively manage short-term liquidity for effective easing.
- Madan Sabnavis (BoB): Sectors tied to the US economy may falter; lowering repo sends a supportive signal.
- Upcoming Liquidity Boost:
- A ₹2.6 lakh crore dividend transfer from RBI to the government is expected in May, further supporting the liquidity push.
