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RBI MPC’s rate cut: A steady debut
Today’s monetary policy reflects a steady state of thinking at RBI. Today's rate cut continued the MPC pivot to the “neutral” stance in October and the CRR cut in December.
The Reserve Ban of India’s (RBI) monetary policy committee (MPC) today unanimously voted in favour of cutting the repo rate by 25 basis points to 6.25%, the first rate cut since May 2020. The monetary policy stance remains unchanged at “neutral”.
The RBI also introduced forward contracts in government securities, allowing long-term investors such as insurance companies to manage their interest rate risk. The RBI also allowed non-bank brokers registered with the Securities and Exchange Board of India (Sebi) to access the RBI electronic trading platform for secondary market transactions.
Today’s monetary policy was set against an interesting backdrop. The new US tariff policies have raised global trade tensions while the momentum of domestic growth has slowed. Urban consumption, the mainstay of private sector demand, has moderated due to the exhaustion of excess savings from the pandemic and tightening prudential norms for consumption-driven retail credit.
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Along with other emerging markets, the Indian economy faces the challenges of a depreciating currency. The RBI’s record $100 billion-plus forex intervention (spot plus forward) has led the banking system's liquidity into deficit from surplus, leading to call rates going 30-40 basis points above the policy rate, leading to higher deposit costs. While the RBI cut the cash reserve ratio (CRR) by 50 basis points in its December policy, which had released ₹1.16 trillion of liquidity, it was insufficient.
Removing disarray
Since December, the regulator has been working to remove currency and banking system liquidity disarray. The RBI has become judicious in forex intervention, letting the rupee find its equilibrium.
While the rupee has depreciated by 3% since December, it has largely been catching up as it did not depreciate along with other emerging market currencies during the phase of October-November 2024. The RBI also announced multiple liquidity measures, injecting more than ₹1.5 trillion of liquidity, which helped bring call rates close to the repo rate.
Hence, given the fiscally prudent budget and the change in RBI leadership, there was a slew of expectations from this MPC policy. Some participants expected the central bank to signal steeper rate cuts or announce aggressive liquidity-easing measures in the policy.
Also Read: RBI bites the bullet and cuts rate but red-flags global pressures on growth
However, the monetary policy reflects a steady state of thinking at the RBI. Today’s rate cut continued the MPC pivot to the “neutral” stance in October and the CRR cut in December.
Slowdown in FY26?
The key consideration for today's rate cut was the expected slowdown in FY26 compared to the RBI’s earlier forecasts, not just meaningful comfort on inflation. The central bank did not announce any new liquidity measures but indicated that they would remain proactive in ensuring adequate liquidity in the banking system.
The growth and inflation forecasts of 6.7% and 4.2%, respectively, for FY26 were largely in line with market estimates. The retention of a “neutral” stance also reflects the need to retain flexibility to slow down in case of a rise in global volatility.
The major change that could meaningfully relieve the banking sector could be the deferment of macroprudential norms on liquidity coverage ratio and higher provisioning norms for infrastructure projects. This should support the banks' near-term profitability.
While FY26 growth may still print below the RBI’s forecast of 6.7% due to global headwinds, it is expected to remain at a healthy 6% plus. Given the limited upside from further disinflation, we expect a shallow monetary easing cycle of 50-75 basis points, including today’s rate cut.
Also Read: How would 25 bps RBI rate cut reduce monthly home loan EMI and tenure? Explained
However, a lot is already priced in at the longer end of the yield curve. The 10-year yield has already rallied from 7.15% last year to 6.70% in anticipation of the rate cuts, whereas the short to medium end of the yield curve has largely remained flat. Once the rate cut cycle starts, this segment can benefit greatly from the possible mark-to-market gains, given the attractive spread over policy rates.
Anurag Mittal is the head of fixed income at UTI Asset Management Co. Ltd.
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Business NewsEconomyRBI MPC’s rate cut: A steady debut
First Published:7 Feb 2025, 07:58 PM IST
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