Tentative Cut Likely Again; RBI May Prioritise Liquidity, Transmission

The Reserve Bank of India appears poised for a tentative rate cut in April, an encore from February, as it balances external volatility, liquidity concerns, and financial stability. While the case for aggressive easing remains weak, the central bank may ease rates cautiously, with a sharper focus on injecting liquidity and ensuring better transmission rather than embarking on a full-fledged rate-cutting cycle, including the adoption of an accommodative stance.

The State of the Economy article in the RBI’s latest bulletin underscores the challenges at play. A widening divergence in global monetary policy, persistent foreign portfolio outflows, and rupee depreciation pressures have complicated the rate-cut equation. At the same time, India’s economic resilience, improving consumption, and cooling headline inflation offer scope for continued calibrated easing.

A rate cut in April, if it materialises, will be tactical, reinforcing the shift initiated in February while ensuring that the transmission of the previous rate cut takes hold. Liquidity management will be front and centre, with open market operations, repo interventions, and targeted liquidity tools expected to play a larger role than just rate adjustments.

External Risks
The Indian economy remains solid, with GDP growth projected at 6.5% in 2024-25, buoyed by robust consumption, government spending, and steady investment flows. The latest October-December GDP print of 6.2% indicates momentum is holding up, even as the global landscape remains uncertain.

Inflation has moderated, with headline CPI cooling to 3.6% in February, driven by a drop in food prices. However, core inflation inched up to 4.1%, signalling underlying price pressures remain sticky. While this does not pose an immediate threat, it reduces the RBI’s urgency for deep rate cuts.

Externally, risks have intensified. The US Federal Reserve has delayed its easing cycle (it again held rates steady Thursday), while policy actions among other major central banks have diverged, adding to capital flow uncertainty. In February alone, sustained FPI outflows pressured the rupee and equity markets, forcing the RBI to intervene actively in forex markets and liquidity operations. A hasty rate cut in this environment could amplify capital flight, making it a delicate balancing act for the RBI.

Liquidity Injection 
Rather than a singular focus on rate cuts, the April policy will likely lean on liquidity-boosting measures to keep financial conditions stable. The RBI has already deployed OMOs, variable rate repo auctions, and foreign exchange swap operations to manage liquidity mismatches.

Given fiscal flows and foreign capital trends, a liquidity squeeze in coming months remains a key risk. The RBI is expected to step up interventions, ensuring that market liquidity does not tighten excessively, especially as credit demand stays firm.
One of the RBI’s key concerns remains weak transmission of past rate cuts. 

With inflation easing and borrowing costs structurally lower, the RBI is likely to intensify moral suasion, nudging banks to reduce lending rates faster. This could involve:

• Stronger communication to banks, both publicly and behind closed doors, to ensure better pass-through.
• Targeted liquidity measures to incentivise lending to key sectors.
• Potential tweaks in liquidity frameworks, ensuring that rate cuts translate into actual borrowing cost reductions.

The April policy is shaping up as another tentative cut rather than an aggressive easing signal. 

If the external situation stabilises, inflation continues to trend lower, and financial conditions do not deteriorate sharply, the next decisive rate cut may only come in June or later. For now, the RBI is treading carefully, opting for a mix of measured rate action, liquidity intervention, and stronger persuasion of banks to sustain domestic economic momentum.

Also Read:

RBI’s Liquidity Blind Spot: Growth Needs A Clearer Policy
RBI Swings To Action With OMO Buys As Rate Cut Getting Wasted