With the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) commencing its first meeting of FY26 today (April 7), Barclays projected another rate cut of 25bps, while retaining the stance as neutral. The MPC will determine the outcome of the key lending rates for the central bank, scheduled to be announced on Wednesday (April 9). “We see an outside chance that the MPC decides to ease by 35bp, acknowledging the sizable undershoot vs estimated CPI inflation. We see downside risks to RBI’s growth and inflation forecasts,” said Aastha Gudwani, India Chief Economist, Barclays.
The RBI commenced the long-awaited easing cycle by cutting the policy repo rate by 25bp in February and has since announced a slew of liquidity infusion measures. “While liquidity has turned into a marginal surplus, the data backdrop since the February meeting suggests more easing is warranted,” Barclays stated.
Radhika Rao, Executive Director and Senior Economist, DBS Bank, said, “We look for a 25bp cut in the repo rate to 6 per cent along with a change in stance to accommodative at the April meeting, tapping into the wide real rate cushion. Policy guidance will be important as markets price in the possibility of at least two rate cuts in the coming months. While confident on domestic developments, the MPC is likely to be guarded on the uncertain global backdrop as trade distortions pose stagflationary risks to the US and raise the risk of slower global trade. While on an easing path, we are not in the camp expecting an aggressive easing cycle this year.”
The central bank conducts the MPC meeting every two months in a year, marking six meetings for a financial year. According to a Reuters poll, the RBI is expected to announce a 25 basis point cut in rates at the meeting.
A 25 bps cut in offing
According to economists, the monetary policy committee will most likely opt for a rate cut in its April policy review, even as the liquidity situation in the banking system has improved, in order to support growth which may be facing downward risk due to the tariff impact. Sankar Chakraborti, MD & CEO, Acuité Ratings & Research Limited, said, “The Reserve Bank of India (RBI) is widely expected to cut the repo rate by another 25 basis points in its April 9 meeting, reinforcing its shift toward a growth-supportive monetary policy. With inflation steadily moderating and economic growth struggling to gain momentum, the central bank faces little choice but to extend its easing cycle.”
Inflation projection
At 3.6 per cent YoY, Barclays said, CPI inflation for February came in even lower than its consensus estimate of 3.8 per cent YoY. “Food disinflation drove the fall in headline CPI. We are tracking March CPI inflation at 3.7 per cent YoY, implying average CPI inflation during January March at 3.9 per cent YoY, a sizable 50bp below the RBI MPC’s 4.4 per cent YoY estimate. We are now tracking FY24-25 average CPI inflation at 4.7 per cent YoY and see it slowing to 4 per cent YoY in FY25-26. Assuming a real rate of 1.5 per cent, we forecast the terminal policy rate at 5.5 per cent by December 2025,” said Aastha Gudwani.
Growth projection
GDP growth for Q3FY25 improved modestly to 6.2 per cent YoY, up from 5.6 per cent YoY, suggesting that the trough is behind us. High-frequency data since then have been mixed, at best. “We are tracking Q4FY25 real GDP growth at 6.7 per cent YoY, implying average GDP growth of 6.2 per cent YoY for FY24-25. If realised, this would be 30bp lower than the MoSPI’s and RBI’s 6.5 per cent YoY forecast,” Aastha Gudwani said.
With the RBI MPC facing inflation and growth outcomes that are below their estimated trajectory, it opens policy space to deliver a second successive policy repo rate cut. “In our base case, we expect the RBI MPC to cut repo rate by 25bp and keep the policy stance unchanged at ‘neutral’,” Barclays analysis stated.
However, given the meaningful undershoot versus estimated CPI inflation, Barclays said, there is a strong case for the MPC to deliver a non-standard 35bp cut. “There is a precedent for the RBI to deliver a non-standard cut, if warranted. As CPI inflation is set to align with the target, in our view, now could be an opportune time to acknowledge it with a non-standard cut. We are mindful that a non-standard cut could suggest panic on growth, but we advise against this perception. In our view, a 35bp cut should be seen as a compensation for keeping the stance as ‘neutral’ (given continued global uncertainty), while acknowledging the downside risks to inflation and growth,” said Aastha Gudwani while maintaining that the RBI is not expected to revise its GDP growth and CPI inflation estimates.
Radhika Rao added, “While inflation readings might head back towards 4 per cent, we don’t expect a marked departure from the target. Growth, meanwhile, is seen around 6.4-6.5 per cent in FY25 and FY26, down from the 8 per cent run rate in the previous two years.”
RBI managing liquidity conditions
The banking system liquidity deficit, which widened earlier in the quarter due to the central bank’s forex market interventions, has improved following liquidity injections. The RBI has infused Rs 6.8 lakh crore through Open Market Operations (OMO), Variable Rate Repo (VRR) auctions, and forex swaps, bringing down the liquidity deficit from Rs 2 lakh crore in January to Rs 1.6 lakh crore in March. “Despite these interventions, liquidity remains tight, particularly for non-bank financial companies (NBFCs) and small businesses that rely on bank credit. Another rate cut could ease funding constraints, providing a much-needed boost to economic momentum,” Barclays said.
Since 7 February, the RBI has announced OMO purchases of Rs 2 trillion-plus, two long-dated VRR operations and two additional USD-INR buy-sell swap operations amounting to ~Rs 1.7 trillion. “In fact, year-to-date liquidity infusions have already exceeded Rs 7.5 trillion, leading to system-wide liquidity finally turning to a surplus at the end of March. The liquidity surplus is likely to continue to increase as the latest OMO purchase of Rs 800 billion (announced on 1 April) follows through, further supported by the upcoming bumper RBI dividend at end-May,” Barclays said.
Further, according to media reports, the RBI is looking to review the current liquidity framework. “While we do not expect the contours of a refined framework to be unveiled alongside the April policy statement, we believe durable liquidity infusion measures are here to stay and see more OMO purchases, long-dated VRR operations, additional FX swaps, and likely TLTROs as the situation demands. We no longer see the need for a CRR cut in FY25-26 to manage the liquidity situation,” Barclays concluded.