In a measured outlook ahead of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting this June, BofA Securities has signalled that while a 25 bps rate cut is expected, there is no pressing need for the central bank to ‘aggressively guide markets toward deeper easing’. Since the GDP growth is still within the projected ranges, and inflation is expected to remain below-target, Rahul Bajoria, Head of India and ASEAN Economic Research, BofA Securities, said that the case for deeper rate cuts is not strong enough.
“The RBI can keep moving the cycle forward, but we think there is no need to aggressively guide for a lot more. This could mean that the markets may be overpricing the easing cycle for now. The RBI in fact could start focusing on transmission, to make the previous cuts more effective,” he said.
Need for a period of strategic patience
Now unlike chess, monetary policy is not about any zero sum games between the two sides. For the RBI, BofA Securities maintained, the act of inducing policy moves, and initiating periods of strategic restraint can be expected, as the cycle slowly matures, and the need to be patient to see desired outcome rises.
So far this year, the central bank has announced significant liquidity easing measures, and maintained a pace of cuts in interest rates. While it does have space to announce more cuts in the foreseeable future, since the GDP growth is still within the projected ranges, going for deeper rate cuts is not making much sense as now.
BofA Securities said, “The RBI can keep moving the cycle forward, but we think there is no need to aggressively guide for a lot more. This could mean that the markets may be overpricing the easing cycle for now. The RBI in fact could start focusing on transmission, to make the previous cuts more effective.”
Liquidity and interest rates as its primary tool
“In the policy easing undertaken so far, we see RBI having its three key policy tools, liquidity (the rook), interest rate (knight), and foreign exchange (bishop) for policy intervention.”
So far, per the analysis by BofA Securities, the RBI has chosen to primarily design its policy easing around liquidity and interest rates, while letting the exchange rate be flexible and volatile to adjust as per the trilemma. This strategy is highlighting the central bank’s policy commitment to keep easing as it enters the middle part of its policy easing cycle.
BofA Securities believed that the RBI is unlikely to make any big changes to its outlook and will probably stick to its forecasts of slow growth and low inflation. While markets are expecting another 60 bps rate cuts, the RBI is likely to move cautiously, adjusting the size and timing of cuts based on new data.
BofA estimated the repo rate eventually reaching 5.5 per cent in this cycle. The RBI is currently projecting FY26 GDP growth at 6.5 per cent, which is slightly higher than the brokerage firm’s projection of 6.3 per cent. While inflation may be revised down in the short term, BofA cautioned against a big downgrade, given the nature of the inflation decline is centered around perishable food prices, which can rebound quickly.
Between December 2024 and March 2025, the RBI provided a triple round of easing, by reducing policy rate in February, undertaking significant liquidity easing, and providing regulatory forbearance to banks, all of which led to an immediate change in sentiment around the policy environment.