Room for more easing

SCOPE FOR 25-50 BPS RATE CUT, GIVEN THE ELEVATED REAL RATES AND A COMFORTABLE INFLATION TRAJECTORY

- UPASNA BHARDWAJ

AS THE MONETARY Policy Committee (MPC) gears up for its upcoming policy review, markets are bracing for signals that could provide guidance on the trajectory of incremental monetary easing and the outlook for liquidity conditions.

The coordinated monetary and fiscal expansion policies this year-in the form of 100 basis points (bps) of repo rate cuts, cash reserve ratio (CRR) cuts, open market operations OMO purchases, and income tax and goods and services tax (GST) rate cuts-have helped cushion the Indian economy against external headwinds stemming from delays in the US trade deal and persistently elevated tariffs.

Despite a strong policy thrust, policymakers find themselves at a critical juncture-scrutinising the resilience of the recent economic revival and deliberating on the necessity for additional measures.

One of the key uncertainties for the economy is the unclear impact of elevated tariffs on the external balances. While front-loaded exports to the US and diversification into new markets have helped cushion the blow, the adverse effects appear to have deepened for India's merchandise trade since September. The goods trade deficit widened to around $32 billion in September and further expanded to a record high of approximately $42 billion in October. Although much of the recent weakness stems from a surge in gold imports, the full extent of tariff-related pressures remains uncertain, especially as the trade deal continues to be delayed. Recently, the policymakers announced trade relief measures to counter the headwinds to exporters arising due to US tariffs.