The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is expected to cut the key interest rate by another 25 basis points (bps) in April, following a 25 bps cut in February, to support slowing economic growth and ease inflation pressures. Economists believe that the growth slowdown requires policy support, with the RBI’s medium-term composite leading index indicating an ongoing cyclical growth slowdown.
The February rate cut was the first under RBI Governor Sanjay Malhotra and the first cut in nearly five years, with the MPC voting unanimously to cut the repo rate by 25 bps to 6.25% to support slowing economic growth, as inflation was no longer a major concern. The central bank’s neutral policy stance indicates that the rate cut cycle will be shallow, given volatile global financial conditions and depreciation pressures on the currency.
According to the MPC minutes, there was a divide between external and internal members on the assessment of growth and the urgency to ease policy rates. While external members raised concerns about the risk of monetary policy exerting downward pressure on growth, internal members believed that growth momentum would revive in the second half of fiscal 2025.
The RBI’s decision to cut rates was primarily due to concerns over the growth slowdown and a more favorable inflation outlook. The union budget’s focus on fiscal consolidation and agriculture was seen as enabling price stability, while other members cited the need for monetary policy to complement fiscal policy.
Economists expect the rate cut cycle to be around 50-75 bps in 2025, with the next cut likely in April. The baseline view of all MPC members is that the slowdown in GDP growth in the second quarter of fiscal 2025 is the trough, and a gradual recovery is likely in the second half of fiscal 2025 and into fiscal 2026. However, this recovery is seen as weak, with subdued private investment, mixed consumption demand, and high global trade uncertainty.