Context:
The Monetary Policy Committee (MPC) meets this week under the shadow of global volatility driven by trade wars, inflation risks, and recession fears. Amid this turbulent backdrop, the Reserve Bank of India (RBI) is widely expected to maintain its accommodative stance and potentially deliver a 25 basis-point repo rate cut to 6%.
Key Macro Trends Influencing RBI’s Policy Path
1. Global Trade Tensions and Uncertainty
- The US tariff hikes and retaliatory actions globally are expected to slow down world growth and heighten inflation.
- India, like other current-account-deficit economies, must manage capital outflows and currency risks prudently.
- Core inflation in the US remains sticky, limiting Fed action, but demand slowdown may force a policy pivot.
2. Export-Led Deflation Risks in Asia
- Excess supply from China, Vietnam, Mexico, and Japan is feeding deflation risks due to export redirection.
- This deflationary wave may counterbalance global inflation, but could trigger more protectionism in Asia, complicating recovery.
3. Weak Domestic Growth Signals
- High-frequency indicators show urban demand weakness, while rural consumption remains steady.
- Uncertainty is delaying the private capex cycle and pressuring corporate earnings through margin compression and US market exposure.
- India’s GDP forecast of 6.5% for FY26 carries a 40–50 bps downside risk due to external shocks.
4. Benign Inflation Outlook and Liquidity Easing
- Inflation is expected to remain near 4%, assuming favourable monsoon conditions (El Niño-neutral forecast).
- The RBI has already infused ₹6.5 trillion in durable liquidity through:
- CRR cuts
- OMO bond purchases
- Forex swaps
- Transition to variable repo auctions
- The rupee’s recent strength may allow RBI to intervene and inject more liquidity, helping smooth monetary transmission and absorb the central bank’s $89 billion short forward book.
Expected Policy Decision and Forward Guidance
- Forecast: A 25 bps repo rate cut, bringing it to 6.00%, with a high chance of stance shift to “accommodative.”
- Dissent is likely on the stance change, given ongoing global financial volatility.
- Future rate trajectory: Repo rate could fall to 5.00%–5.25% if global headwinds intensify.
- The RBI may refrain from aggressive front-loading of cuts to avoid financial instability amid widespread uncertainty.
Awaited Announcements
- New liquidity framework guidance, including:
- Status of weighted average call rate (WACR) as operating target
- Reintroduction of on-tap fixed repo operations
- Possible fine-tuning liquidity instruments for short-term management
The RBI is poised to continue easing, but with measured steps. As the global economy teeters on the edge of stagflation and recession, India’s central bank must support domestic growth while guarding against currency shocks and inflation surprises. A gradual, data-driven policy response appears to be the best strategy amid this uncertain environment.
