Economists expect that the Reserve Bank of India will continue on its monetary policy easing cycle following the release of the minutes of RBI Monetary Policy Committee (MPC)’s February meet. While the quantum of easing is likely to be shallow, a cut in the key lending rate is likely in the April meeting.
The first meeting of the RBI’s MPC was held from February 5 to February 7, chaired by new Governor Sanjay Malhotra. The MPC unanimously decided on a quarter-sized repo rate cut, marking the first cut in around five years. During the meeting, every member spoke of the need to cut rates to support flagging growth, with inflation now becoming less of a concern.
Despite the dovish tones seen in the RBI’s commentary, none of the MPC members offered any forward guidance, as a result of global uncertainties. As a result, they remain data dependent and retain ‘flexibility’ to respond to the evolving environment.
Certain MPC members also discussed the rupee depreciation. However, most MPC members believe that policy rates should not be held hostage to the currency. Saugata Bhattacharya added that the estimated impact of currency depreciation is quite mild – a five percent rupee depreciation leads to an uptick of ~35 basis points in CPI inflation (while growth improves by 25 basis points due to a short-term boost to exports).
On the currency front, Dr Ranjan said, “It needs to be emphasised that India’s forte is its immense growth opportunities and strong macroeconomic fundamentals. There is a need to preserve the high growth momentum over the medium term, necessitating monetary policy to be sensitive to the evolving growth scenario and use various policy instruments including liquidity injection to reinvigorate growth. Capital flows to India are driven more by its distinctive growth story rather than interest rate differentials, a phenomenon observed for many EMEs.”
He added that interest rate defence of exchange rate could turn out to be counter-productive especially during periods of global tide towards outflows driven by factors that do not differentiate across nations such as the risk-taking propensity of global investors or uncertainty driving reserve currency strength.
Analysts at domestic brokerage Emkay Global noted that while the commencement of the rate cut cycle was on expected lines, going ahead, however, they see a shallow rate cut cycle of 25-50 basis points. “Further liquidity easing measures also possible. Delay in implementation of the ensuing LCR and project financing/ECL provisioning, at least till end-FY26, should also be viewed as easing by stealth, in our view,” added the brokerage.
Nomura Holdings noted that the overall macro view of the MPC members is one of benign inflation and a sub-par growth recovery, and they don’t see currency weakness as a hurdle to rate cuts. “Yet, global uncertainties have tied their hands in terms of providing any forward guidance, and policy remains data dependent. In our view, growth is likely to continue to disappoint.”
As a result, the brokerage continues to expect 75 bps of additional cuts, more than consensus (25-50 bps), to a terminal rate of 5.50 percent by end-2025, with the next cut likely in April.
