Bond between ECB and RBI: No immediate interest rate cuts expected by India’s central bank
The Reserve Bank of India Likely to Cut Interest Rates Again
A Reuters poll of economists has found that the Reserve Bank of India (RBI) is expected to cut interest rates at its second consecutive meeting on April 9, with just one more reduction anticipated in August, which would be the shortest easing cycle on record. With inflation in India falling to a seven-month low of 3.61% in February and an economic growth forecast of 6.4% for this fiscal year, the weakest in four years, the central bank has room to lower borrowing costs further.
A strong majority of economists, 54 out of 60, participating in the March 18-27 poll, predicted that the RBI would reduce its benchmark repo rate by 25 basis points to 6.00%. One respondent forecast a more significant reduction of 50 basis points, while five others expected no change. According to Dhiraj Nim, an economist at ANZ, "There are not many strong growth drivers going into fiscal year 2026…they (RBI) need to sustain their support to growth. Inflation has also created a lot of room for them to ease. So I think they should utilise that space and sort of recalibrate monetary policy." Nim emphasized the importance of sustained support from the RBI, particularly considering the significant slowdown in consumption and investment.
Understanding the Monetary Policy Framework
The RBI has been actively injecting liquidity into the banking system over the past few months, adding about $64 billion of rupees to increase money supply. Economists noted that this injection was necessary for rate cuts to be effective across the broader economy. However, several experts also pointed out that it would take a few more months for the liquidity injected to translate into lower borrowing costs for consumers and businesses.
To ensure efficient transmission of monetary policy changes, economists stressed the need for positive banking sector liquidity. Indranil Pan, chief economist at Yes Bank, commented, "If transmission needs to happen, especially in a rate-cutting cycle, (banking sector) liquidity needs to be on the positive side." Pan added that liquidity is expected to start improving from April 2025, as government expenditures pick up pace.
Anticipated Rate Cuts and the Economic Outlook
The median forecasts in the poll suggested that the RBI will maintain interest rates at 6.00% in the June 4-6 meeting. However, a narrow majority of economists, 29 out of 49, predicted a reduction to 5.75% in August, which has remained consistent with last month’s views. This would be followed by an extended pause until at least the first half of next year.
The expected total rate cuts over this cycle, totaling 75 basis points, are anticipated to mark the shortest easing cycle since early 2000. Sakshi Gupta, principal economist at HDFC bank, noted, "I think this is going to be a shallow rate cut cycle to begin with…Depending on what happens on the global front, drags of capital outflows and what the U.S. Fed does." Gupta pointed to the risk of capital flight and the impact of monetary policy decisions from other countries, particularly the United States.
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Conclusion
In conclusion, the RBI is likely to cut interest rates for a second straight meeting in April 2025, but only one more rate reduction is anticipated until August. The central bank has room to reduce borrowing costs further given India’s relatively low inflation and its weakest economic growth forecast in four years. However, several economists stressed that it will take a few months for the liquidity injected by the RBI to translate into lower borrowing costs across the broader economy.
