Expect more monetary easing

The upcoming Monetary Policy Committee (MPC) meeting is likely to remain in focus more for its forward-looking guidance than the rate action.

- ANUBHUTI SAHAY

Markets widely expect a unanimous decision by the MPC to reduce the repo rate by 25 basis points (bps) to 6.0%. Slowing inflation—which came in at 3.61% in February and likely remained below 4% in March—amid a moderate growth recovery and an uncertain external environment gives the MPC space to cut rates to support domestic economic activity. A relatively stronger rupee (as compared to a few weeks ago) also provides it room to do so without worrying significantly about rapid depreciation pressure on the INR.

Greater focus remains on whether (a) the MPC will change its stance to accommodative from neutral, and (b) the tone of statement will tilt more to dovish, as against the balanced tone in the last meeting in February. Clarity on both these issues will shape market expectations on the future repo rate trajectory.

We expect the MPC to maintain its "neutral" stance and the statement to have a balanced tone. However, a section of the market expects a shift in stance to accommodative and the statement to be more dovish. This expectation of a switch in stance and tone is likely reinforced by two factors.

First, a global growth scare driven by sharp tariff increases announced by the US on April 2. We acknowledge the increased downside risks to global growth. Our global team estimates that an increase in effective average US tariff rate from c.4.8% to 25%, can translate into a drop of c.0.5 percentage point in global growth.

Should trade partners retaliate, global growth can potentially slip towards 2% (from our current forecast of 3.2%) considered recessionary for the world economy.