After a long-awaited rate cut of 25 bps in February, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is expected to reduce the key interest rate by another 25 bps in April as inflation pressures are easing and growth requires policy support, said economists. Sonal Varma, Managing Director and Chief Economist (India and Asia ex-Japan), Nomura, said, “Our medium-term Nomura India Composite Leading Index still points to an ongoing cyclical growth slowdown, and we expect GDP growth to remain soft at 6.0% y-o-y in FY25 (advance estimate: 6.4% ) and 5.9% in FY26 (RBI: 6.7%). Hence, we continue to expect 75bp of additional cuts, more than consensus (25-50bp more), to a terminal rate of 5.50% by end-2025, with the next cut likely in April (see India: Will growth remain below 6%? , 21 February 2025).”

IDFC First Bank said that the neutral policy stance indicates that the rate cut cycle will be shallow given volatile global financial conditions and depreciation pressures on the currency. “We expect the rate cut cycle to be 50bps to 75bps in 2025 (this includes the 25bps cut in February),” it stated.

The February rate cut was the first under RBI Governor Sanjay Malhotra and the first cut in nearly five years. At the meeting, held on February 5-7, the MPC voted unanimously to cut repo rates by 25bp to 6.25 per cent, while retaining a neutral stance, to support slowing economic growth, as inflation was no longer a major concern. The central bank had released the minutes of the MPC meeting on February 21

Was it a smooth sailing at the February meeting?

According to the RBI MPC minutes, there was a divide between external and internal members on assessment on growth and urgency to ease policy rates. “The concerns on growth were more pronounced among external members who raised the risk of monetary policy exerting downward pressure on growth,” said Gaura Sengupta, Chief Economist, IDFC FIRST Bank, while analysing the MPC minutes. 

Prof Ram Singh stated that high interest rates and regulatory tightening has brought down credit growth. Real policy rates measured as repo rate minus core CPI inflation is more than 2.5 per cent for the last year, which has acted as a drag on investment growth. Saugata Bhattacharya highlighted the slowdown in credit growth to the labour intensive MSME sector as a matter of concern. Interest cost to EBIDTA for smaller companies remains significantly elevated. Dr Nagesh Kumar advocated for a 50bps cut in February itself to signal RBI’s intent that it will do whatever it takes to revive economic growth. However, he ultimately voted for a 25bps cut due to heightened global uncertainties. 

Meanwhile, among the internal members, the concern on growth was more tempered with growth momentum expected to revive in H2FY25 onwards, with both consumption and investment likely to rise. Dr Rajiv Ranjan indicated that elevated inflation levels had prevented policy rate cut in December 2024. Governor Sanjay Malhotra advocated for a neutral stance as it provided policy flexibility to respond to the changing macro environment.

Further, increased depreciation pressures on the INR were not seen as a hurdle to easing monetary policy. Dr Rajiv Ranjan stated that India attracts growth capital and using interest rates as a defence could be counterproductive. The need for liquidity infusion was also stressed by members to ensure transmission of the rate cut and revive the capex cycle.

Why the cut?

The decision to cut repo rates was primarily due to concerns over the growth slowdown and a more favorable inflation outlook. Sanjay Malhotra also saw the Union Budget’s focus on fiscal consolidation and agriculture as enabling price stability, while other members cited the need for monetary policy to complement fiscal policy. 

Gaura Sengupta said, “In the run-up to the policy, RBI had begun infusing durable liquidity with a CRR cut, OMO purchase and USDINR buy-sell swaps. Since December 2024, RBI has infused Rs 3 trillion of durable liquidity. This has resulted in core liquidity deficit reducing to Rs 0.24 trillion as of February 14th, 2025, from a deficit of Rs 1 trillion as of November 2024. RBI has announced additional liquidity infusion which will be conducted via $10 billion (Rs 0.9 trillion) buy-sell swap. Despite this substantial additional liquidity infusion, we see space for additional liquidity infusion of Rs 400 billion till March 2025, to make core liquidity zero or a small positive.”

Weak growth recovery: The baseline view of all MPC members is that the slowdown in GDP growth in Q2 FY25 (to 5.4 per cent) was the trough and a gradual recovery is likely in H2 FY25 and into FY26 (6.3-6.8 per cent). However, Nomura maintaine, this recovery is seen as weak, with subdued private investment, mixed consumption demand and high global trade uncertainty.

Benign inflation: CPI inflation is seen as aligning with the target in FY26, with the food inflation outlook ‘decisively positive’, as per the RBI governor. Low core inflation and softer global commodity prices are also positives.

External risks: The minutes revealed a greater focus on ‘uncertainty’ due to global developments surrounding trade policies under Trump 2.0 and currency risks. However, most MPC members believed that policy rates should not be held hostage to the currency.