RBI likely to go for 25 bps rate cut

Economists are unanimous that the Reserve Bank of India will deliver a quarter percentage-point cut in policy interest rate this week on easing domestic inflation, but are divided on a shift in its monetary stance amid the tariff war that is causing unprecedented uncertainty in global trade and financial markets.

All 14 institutions polled by ET predict the central bank's Monetary Policy Committee to cut the repo rate, or the rate at which the RBI lends to banks, by 25 basis points at its three-day meeting that starts Monday.

Half of them envisage the RBI to maintain a neutral stance, while five see it to indicate an easing cycle by moving to an accommodative stance and two expect a 50-50 chance to such a shift.

"With global uncertainty now higher than usual, we believe it demands a degree of freedom that a 'neutral' stance offers. Additionally, a 'neutral' stance suggests that a pause is also on the table and not every meeting should be seen as an opportunity to cut," said Aastha Gudwani, India chief economist at Barclays.

Policy makers across the world are grappling with uncertainty unseen for nearly a century, as US President Donald Trump is turning the global economic order on its head with tariffs across the board. Since this is an unchartered territory and Trump being unpredictable, economists are unable to forecast with confidence the course that financial markets and global trade would take.

Wait-&-Watch Mode

But they are certain that the world economy will slow down, and nations will have to find new ways to overcome the obstacles.

In this scenario, the RBI is unlikely to commit to a monetary policy path even as its primary headache of domestic inflation is cooling. It cut the policy repo rate by 25 basis points to 6.25% in February. Economists expect that once the 6.00% rate is achieved in April, the central bank would likely wait and watch before committing to its rate reduction trajectory amid uncertainty over US rates, tariffs and currency trajectory.

India's retail inflation, as measured by the Consumer Price Index (CPI), slumped to 3.61% in February from 4.26% in January. It slipped below the RBI's 4% target for the first time in seven months and was also slower than the estimate of 3.98% in a Reuters poll. Economists expect the inflation print for March to again undershoot RBI's estimates.

Liquidity measures

The central bank has also managed to cool the market rates with liquidity measures. It has injected durable liquidity via open market operations, a cut in its cash reserve ratio and dollar rupee buy-sell swaps. However, volatile global situations and uncertainty on the US central bank action may prompt it to retain the neutral stance in the April policy.

"Given the heightened uncertainty, we think April MPC will cut and hold for further data/event development rather than outrightly sound dovish and commit to a deep easing cycle just as of now," said Anubhuti Sahai, head of India Economic Research at Standard Chartered Bank.