Context:
RBI has implemented back-to-back rate cuts since February 2025, reducing policy rates by 50 basis points (bps). Effective easing is ~75 bps, as overnight rates are closer to the Standing Deposit Facility (SDF), the lower end of the policy corridor.
Aggressive Liquidity Infusion
- RBI infused â‚ą5.23 trillion into the system via government bond purchases (OMOs) between December 2024 and May 2025.
- The speed of infusion outpaced RBI’s response during the COVID-19 crisis, where a similar liquidity infusion took a full year.
Macroprudential Easing
- Regulatory relaxations include:
- Eased bank lending norms to NBFCs.
- Deferred implementation of Liquidity Coverage Ratio (LCR) requirements for digital retail deposits.
Inflation Dynamics Supporting Easing
- Headline CPI inflation has stayed below 4% since February 2025.
- Food inflation has eased substantially:
- Only 14% of CPI food items are showing >6% inflation, down from 57% a year ago.
- Core inflation remains subdued, reflecting a negative output gap and weak demand-side pressures.
External Environment Favorable for Easing
- The “impossible trinity” challenge (strong dollar, capital outflows, domestic easing) has eased.
- Rupee depreciation pressures have abated amid weakening dollar and concerns over US fiscal stability.
- This offers policy space for RBI to focus on domestic growth.
BS
