‘A repo cut will be very good for the market as it will mean that everything is being done to spur growth in these uncertain times.’
IMAGE: Reserve Bank of India Governor Sanjay Malhotra. Photograph: ANI Photo
The first reaction to the 26% reciprocal tariff levied by the US on India is expected from the Reserve Bank of India’s Monetary Policy Committee in the form of 25 basis points cut in the repo rate, economists said.
The repo rate is the rate at which the RBI lends to the banks. Currently the repo rate is 6.25%.
Economists said the first credit policy of FY26 to be announced by RBI Governor Sanjay Malhotra on Wednesday, April 9, 2025 will be crucial as it will present the central bank’s view on the global economic situation.
“The swift shift in global sentiment, high market volatility and the fear of US/global recession amid the tariff shock cement our conviction of a 25 bps cut this week, with a possible change in stance to ‘accommodative’ to give directional easing bias,” Madhavi Arora, Lead Economist, Emkay Global Financial Services said.
“Amidst global uncertainties, the RBI is likely to cut rates by 25 bps, with an expectation of a change in stance to accommodative from the current neutral,” Ankita Pathak, Macro Strategist and Global Equities Fund Advisor at Ionic Asset by Angel One.
“India is relatively better than the rest of Asia as far as tariffs are concerned, but it is unlikely that it will not see any ripple effect from a global slowdown,” Pathak added.
“The situation today probably actually warrants a rate cut. The reason is that the RBI has done everything to normalise liquidity in the system which is in a surplus presently,” Madan Sabnavis, Chief Economist, Bank of Baroda, said.
“This was an unwritten rule that if liquidity is not in surplus or low deficit, the rate cuts will not work that easily in terms of transmission,” Sabnavis added.
“As the MPC deliberates action on the repo rate, liquidity will not be a major concern. The tools in the armory have been spelt out: OMOs (open market operations), buy-sell forex swaps and VRR (variable reserve ratio) across tenures,” Sabnavis explained.
“This will ensure that liquidity will be provided by the RBI for sure,” Sabnavis added.
If the rate cut materialises, then it will be the second time in succession as the RBI cut the repo rate by 25 bps in February 2025.
The inflation issue, Sabnavis said, has also been addressed to a large extent.
“The consumer price index (CPI) inflation could come at around 3.6% this time for March and will be below the 4% norm. While core inflation could be increasing, food inflation has brought this down along with the base effect, which will linger for some time,” Sabnavis said.
“Therefore, inflation is not a concern right now, while growth requires more attention.”
“Do we believe growth is strong right now or are we as vulnerable as other economies?” Sabnavis asked.
“It may look like that while the overall growth story looks good, there are some pockets which pertain to industries which are sort of oriented towards the USA which can face some setbacks,” he added.
“Therefore, there is a reason to lower the repo rate which will send a strong signal that the RBI would also like the transmission to take place,” Sabnavis said.
According to Arora, FY26 growth and inflation risks are skewed to the downside.
“However, we don’t see RBI front-loading its ammunition but rather keeping it ready for rain(ier) days,” Arora added.
On the other hand Pathak said China’s response to the US tariffs will be important for Asian central banks (including the RBI) and will chart the course for both currency and rates.
The trade war is likely to potentially start a foreign exchange war.
As regards the RBI’s stance which is now ‘neutral’, Sabnavis said future rate cuts could be either ways.
“It may be time to signal that we are only looking at a downward movement with the stance becoming accommodative,” he said.
“If it comes with a repo rate cut,” Sabnavis said, “it will be very good for the market as it will mean that everything is being done to spur growth in these uncertain times.”
Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com
