Context:
Economists project a cut in the repo rate by 25 basis points (bps) in April in support of economic growth.
The February meeting of the MPC saw the policy repo rate cut by 25 bps to 6.25%, this was the first cut after nearly five years.
Key Highlights:
Liquidity is tight, with the banking system remaining in a ₹1.09 trillion deficit for 11 weeks consecutively. Concerns abound that cuts in rates may actually not mean cuts in lending rates due to liquidity.
GDP growth is expected to slow down to around 6% in FY25, following a revision of 9% in FY24.
Economic & Monetary Policy Outlook
- Reasons for Rate Cut Expectations in April
- The inflation trends are getting softer, especially in respect of food prices.
- Economic growth is slowing, requiring policy stimulus.
- The macroeconomic measures are put in place to assist recoveries.
- The MPC’s dovish bias frankly gives space for further easing.
- Leading economists and institutions will have the following views
- DBS Bank: Expects a 25 bps cut in April and possibly thereafter shift towards an accommodative stance.
- UBS: Forecasts a 50 bps reduction of the repo rate in this cycle and some measures aimed at interbank liquidity.
- HDFC Bank: The rationale for further rate cuts is supported by moderate Q3 GDP growth.
Challenges
- As of Monday, the deficit in banking system liquidity stood at ₹1.09 trillion for the last 11 continuous weeks.
- Poor transmission of rate cuts means lending rates that do not link to an external benchmark may not go down.
- Some economists argue that more liquidity problems take precedence over rate cuts
In April, a cut is anticipated but liquidity will likely hinder the cut’s effectiveness. RBI may be required to inject liquidity into the system to facilitate fin
