50 bps rate cut need of hour with softer inflation, improved liquidity & rupee support: Economists
New Delhi [India], March 31 (ANI): The Reserve Bank of India (RBI) is set to announce its monetary policy decision in the second week of April. Economists believe that a rate cut is necessary to support economic growth, with some advocating for a 50-basis-point (bps) reduction, while others expect a more cautious approach.
Debopam Chaudhuri, Chief Economist at Piramal Group, believes that the RBI should adopt a more accommodative stance. He highlighted that the economic slowdown in the latter half of FY25 was partly due to high borrowing costs and slow credit growth. Therefore, policymakers should take measures to ease these bottlenecks.
“A 50 bps rate cut seems to be the need of the hour. Whether RBI will consider it is difficult to predict. At a time when all three major data trends, viz., softer inflation, manageable bank liquidity deficit and improving INR support a rate cut environment, the MPC may move fast.” said Chaudhuri
Regarding global interest rate trends, Chaudhuri explained that the U.S. Federal Reserve has already reduced rates by 100 bps since September 2024, while the Indian repo rate has declined only 25 bps in the same period.
Additionally, U.S. government bond yields have fallen faster than their Indian counterparts, and the U.S. dollar has weakened. Given these factors, he argues that the RBI has enough room to cut rates without worrying about capital outflows.
However, Sonal Badhan, Economics Specialist at Bank of Baroda, expects the RBI to take a more gradual approach. She predicts a 25 bps rate cut in April, with a total reduction of 75 bps in this cycle.
Badhan noted that capital flows are influenced by multiple factors beyond interest rates, including economic growth, geopolitical risks, and global trade trends. She expects capital inflows to improve in the coming months due to India’s strong domestic economy.
She said “We expect RBI to lower repo rate by 25bps in its Apr’25 meeting. Cumulatively we have priced in 75bps rate cut in this cycle. RBI is expected to take a more gradual approach in lowering rates, hence a 25bps cut is more likely”.
Badhan also emphasizes that the RBI makes policy decisions based on domestic factors rather than simply following the Federal Reserve. Since inflation is under control and growth requires support, she expects the RBI to proceed with rate cuts.
She added “RBI has clarified on multiple occasions that its decisions are taken more with respect to domestic factors. Although global outlook is a key input while formulating a policy decision, it won’t be a deciding factor”.
However, both economists agree that with inflation under control and GDP growth improving, the RBI has room to cut rates. While Chaudhuri argues for a 50 bps cut to boost growth, Badhan expects the central bank to opt for a more cautious 25 bps reduction in the short term.
The final decision of the central bank will be closely watched by businesses, investors, and policymakers as they assess RBI’s approach of balancing growth and inflation. The RBI will hold the policy meeting between April 7-9, The Governor will announce the policy rates on April 9 at 10 AM.
