Double Boost: RBI cuts repo rates by 25 bps; stance turns accommodative

9 Apr 2025 , 02:02 PM

WHAT CHANGED SINCE THE FEBRUARY 2025 MONETARY POLICY

If you were to identify the one big factor that has been critical in the period since the last monetary policy, it is the reciprocal tariffs. It was always coming; but in April, the 27% tariffs on Indian goods exported to the US became effective. Some goods like pharma products were exempted from the ambit of reciprocal tariffs, but the impact is still going to be quite huge on metal exports, auto exports etc. In the period since the February policy, there have been positive developments on macros, despite the uncertainty caused by Trump tariffs.

For India the positive triggers came on multiple data fronts. February inflation touched a multi-year low of 3.61%, well below the RBI median target of 4.0%. The current account deficit for Q3FY25 came in at 1.2% of GDP; lower than expected. However, Q2 CAD was revised up to 1.8% of GDP. However, India is again expected to report a current account surplus in Q4FY25, resulting in modest full year CAD at around 1.2%-1.3% of GDP. One positive outcome of Trump tariffs is that economic slowdown fears pushed the price of Brent crude below $65/bbl even as rupee hardened from ₹87.50/$ to ₹85.50/$.

APRIL 2025 POLICY MADE SOME BOLD SHIFTS

It must be said to the credit of the RBI MPC that it managed to announce several bold measures. The repo rate cut was along expected lines, but the decision to shift the stance from neutral to accommodative, was quite a brave one. After all, when you shift the stance to accommodative, it is like saying that the rates can either be flat or come down, but they cannot go up. RBI is also keeping liquidity in surplus to ensure rate transmission.

The real bold changes were on the inflation and growth front. It was expected that the RBI would wait for more data points and evaluate impact of reciprocal tariffs; before changing the inflation and GDP growth estimates for FY26. However, the RBI has gone ahead and cut its growth forecast and also moderated its inflation forecast for FY26. That was brave; considering we are living in rather uncertain macroeconomic times.

HIGHLIGHTS OF RBI POLICY STATEMENT – APRIL 2025

Here are some of the key takeaways from the April 2025 policy statement and the RBI governor’s address post the policy announcement.

• RBI cut repo rates by another 25 bps to 6.00%. The rate cut decision had the unanimous vote of all six MPC members. This also reduces the SDF (reverse repo) rate to 5.75% (25 bps below repo), while the bank rate and the marginal standing facility (MSF) rate are reduced to 6.25% (25 bps above the repo rate).
• Just two policies after shifting the stance of the policy to neutral, the RBI MPC has decided to change the stance of the policy from Neutral to Accommodative. This is a clear indication that the rate journey, from here, will be lower; although rates could be held in a worst case scenario. However, it also means that rate hikes are ruled out.
• The RBI MPC cut the GDP estimate for FY26 by 20 bps from 6.7% to 6.5%. In a sense, the RBI has been proactive in preparing the markets for a likely growth impact of the reciprocal tariffs. Even though India is largely a domestically driven economy, a 30-50 bps fall in global growth will surely have its repercussions on India too.
• The RBI MPC also cut the inflation forecast for FY26 by 20 bps from 4.2% to 4.0%. At the current run rate of inflation and with normal monsoons predicted by SKYMET, the inflation estimates are veering towards 3.8% and lower. The only reasons, the MPC stopped at 4.0% is to make provision for the El Nino effect, if there is a heat wave.

The April 2025 policy has been action-packed, with the RBI taking a proactive approach with respect to growth and inflation forecasts.

RBI MPC CUTS FY26 INFLATION ESTIMATE TO 4.0%

In the February 2025 monetary policy, the RBI MPC had pegged FY26 inflation at 4.2%, which was already sharply lower than 4.8% inflation in FY25. However, if the data of the last few months is any indication, a sharp fall in food inflation has really brought headline inflation down. Even as vegetable prices finally tempered; the early estimates of Rabi output are expecting a bumper output for wheat and select pulses, grown in Rabi season.

The RBI inflation projection of 4.0% for FY26 is distributed as follows. For next 4 quarters; RBI projected inflation for Q1FY26 at 3.6%, Q2FY26 at 3.9%, Q3FY26 at 3.8%, and Q4FY26 at 4.4%. The RBI MPC is pencilling in a lot of front ending of the fall in food prices on inflation in the first two quarters. However, this is assuming that there are no nasty surprises coming from core inflation, which remains the sticky aspect of inflation.

RBI MPC CUTS FY26 REAL GDP GROWTH FORECAST TO 6.5%

For FY25, RBI MPC had reduced its GDP growth estimate from 7.2% to 6.6%, which is higher than the MOSPI estimates of 6.4% for FY25. The FY25 GDP will be announced towards end of May 2025. The focus is now on FY26. In the April policy, RBI MPC cut FY26 GDP growth forecast by 20 bps from 6.7% to 6.5%. That may still be conservative, considering that global GDP impact is around 50 bps. However, the RBI will obviously take it one step at a time.

RBI MPC continues to be optimistic, despite the reciprocal tariffs, due to factors like revival in urban consumption, government capex outlay, higher capacity utilization and healthy balance sheets of Indian companies. The FY26 GDP growth projection of 6.5% has been broken up quarter-wise as follows. For Q1FY26 at 6.5%, Q2FY26 at 6.7%, Q3FY26 at 6.6%, and Q4FY26 also at 6.3%. Tariff impact remains a major X-factor for growth.

POLICY SHIFTS ANNOUNCED BY RBI, OUTSIDE MPC AMBIT

RBI monetary policy went beyond monetary numbers to signal a shift at a policy level. Here are some key announcements.

• The RBI will enable securitization of stressed assets through a market based mechanism. This will help in better dispute resolution and better risk distribution.
• New framework for co-lending to extend beyond banks and NBFCs to all regulated entities (RE) and also extend co-lending beyond just priority sector lending.
• RBI to undertake a comprehensive review of guidelines to harmonize gold lending and also for non-fund based facilities like guarantees, L/C, co-acceptance etc.
• NPCI to announce new higher limits for UPI in consultation with banks and stake holders. However, P2P transactions will continue to be capped at ₹1 lakh.

The April 2025 policy saw a rate cut, shift in stance, and lowering of inflation and GDP growth forecasts for FY26. We await sharper insights into the policy when the minutes are published on April 23 2024; ahead of the next MPC meeting on June 04-06, 2025.