Expect another RBI rate cut in support of GDP growth

India's current economic dynamics also suggest we'll see a strategic change in stance this April

- KAUSHIK DAS

In a widely anticipated move to balance the objectives of growth and inflation, the Reserve Bank of India (RBI) reduced its repo rate by 25 basis points (bps) to 6.25% at the February 7 meeting of its Monetary Policy Committee (MPC), which voted unanimously for this cut. This reflects a proactive but calibrated approach to support an economic recovery, while staying focused on gradually aligning Consumer Price Index inflation with its mandated target of 4%. The MPC's forward-looking approach is commendable, especially given the long lags of policy transmission.

That rate cut came on the back of several liquidity-easing measures announced on January 27, reinforcing RBI's intent to provide a boost to domestic demand. While the central bank refrained from introducing additional liquidity measures on February 7, it announced more liquidity support soon after, enhancing the quantum of open-market-operation purchases and daily variable rate repo (VRR) auctions, coupled with additional 49-day and 45-day VRR auctions of ₹150,000 crore and a 3-year buy-sell forex swap of $10 billion. RBI is expected to announce more open market operations and VRR auctions in the coming months. A large dividend payout to the government, expected in May, will also inject liquidity into the system.

Governor Sanjay Malhotra's assurance that RBI will remain vigilant in managing liquidity underscores the central bank's dual focus on macro stability and growth. Its decision to hold the cash reserve ratio (CRR) steady at 4%—after a 50-bps cut in December—was prudent as a buffer must be maintained in case of an economic shock. This approach lets RBI retain flexibility.