This reflects a proactive but calibrated approach to support an economic recovery, while staying focused on gradually aligning Consumer Price Index inflation with its mandated target of 4%. The MPC’s forward-looking approach is commendable, especially given the long lags of policy transmission.
That rate cut came on the back of several liquidity-easing measures announced on 27 January, reinforcing RBI’s intent to provide a boost to domestic demand.
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While the central bank refrained from introducing additional liquidity measures on 7 February, it announced more liquidity support soon after, enhancing the quantum of open-market-operation purchases and daily variable rate repo (VRR) auctions, coupled with additional 49-day and 45-day VRR auctions of ₹150,000 crore and a 3-year buy-sell forex swap of $10 billion.
RBI is expected to announce more open market operations and VRR auctions in the coming months. A large dividend payout to the government, expected in May, will also inject liquidity into the system.
Governor Sanjay Malhotra’s assurance that RBI will remain vigilant in managing liquidity underscores the central bank’s dual focus on macro stability and growth. Its decision to hold the cash reserve ratio (CRR) steady at 4%—after a 50-bps cut in December—was prudent as a buffer must be maintained in case of an economic shock. This approach lets RBI retain flexibility.
Looking ahead, RBI is expected to deliver another 25-bps rate cut in its April policy review, bringing the repo rate down to 6.0%. This is likely to be accompanied by a shift in its monetary policy stance from ‘neutral’ to ‘accommodative,’ signalling a deeper commitment to growth support. The timing of this stance change would be strategic. By waiting until April, RBI can align its liquidity stance more closely with its rate stance, ensuring consistency in its framework.
An April stance change could signal either a deeper and longer rate-cutting cycle or a will to improve liquidity conditions further so that short-term rates stay between the repo and standing deposit facility rates, with the former acting as the ceiling rather than floor.
We lean more towards the second possibility, expecting RBI to deliver an effective easing of 25bps through the liquidity route after having delivered a 50bps rate cut through February and April. Then the effective easing will amount to 75bps.
RBI is unlikely to cut the repo rate beyond 50bps in this cycle, given the global economic backdrop and domestic growth-inflation dynamics. With the US Federal Reserve having cut rates by only 100bps in 2024 and no further cuts expected in 2025, RBI would remain cautious. Its GDP growth estimate of 6.7% for 2025-26, coupled with an inflation projection of 4.2%, suggests that a 50bps repo rate cut and effective easing of 75bps will be adequate in this cycle.
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Excessive rate cuts could risk destabilizing this balance, potentially necessitating a quicker reversal of easing measures, which would be counterproductive. A front-loaded rate-cutting strategy reduces the need for deeper cuts later in the cycle. This approach, combined with fiscal support such as ₹1 trillion in tax cuts and sustained capital expenditure, is expected to narrow the negative output gap without stoking demand-side inflation.
The coordinated efforts of fiscal and monetary policies are poised to sustain non-inflationary real GDP growth in a range of 6.5-7.0% in 2025-26.
The rupee’s trajectory under Governor Malhotra’s RBI leadership is likely to see more two-way movement, reflecting market dynamics. While we forecast the rupee to end at 88 to the dollar by December 2025, near-term volatility cannot be ruled out, especially if global trade tensions escalate. RBI is likely to keep its monetary and forex policies separate, which could help ensure that exchange rate management does not undermine domestic policy goals.
Gradual and modest rupee depreciation is not necessarily a bad thing. It could boost exports and growth on the margin, without significantly exacerbating India’s imported inflation risks. RBI’s 4.2% inflation projection for 2025-26 appears realistic and aligns closely with private forecasts of 4.3%. Even with an effective easing of 75bps, real rates are expected to remain positive by 1.5%, providing ample room for RBI to support growth without compromising price stability.
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While RBI’s growth forecast of 6.7% for 2025-26 is slightly above consensus estimates of 6.5%, it is below the economy’s potential growth rate of 7% or more. This underscores the need for coordinated fiscal and monetary support to bridge the output gap. Notwithstanding the volatility inherent in quarterly GDP data, the broad narrative is unchanged: the economy needs some policy support to achieve its full potential.
RBI’s February policy marked a successful start to Governor Malhotra’s tenure, striking a delicate balance between growth and price stability. By delivering an optimum dose of monetary easing, the central bank has reinforced its commitment to fostering a resilient and dynamic economy. Coupled with the government’s growth-oriented fiscal policy, this approach sets the stage for a robust economic recovery in the quarters ahead, ensuring that India remains on a path of sustainable and inclusive growth.
The author is chief economist, India, Malaysia, and South Asia at Deutsche Bank AG.
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