In March, the US Federal Reserve kept policy rates unchanged, extending the pause that began in January after three successive rate cuts. It preferred to wait and assess the impact of US President Donald Trump’s economic policies. The Fed is now closely watching two key factors: Is inflation heading towards the 2 per cent target? And is the US economy weakening more than what the central bank expected?
For the second consecutive time, the Fed has held borrowing costs steady after bringing them down to the 4.25–4.5 per cent range in December 2024 — a level last seen in December 2022.
The Fed’s latest projections signal two rate cuts during the current year, but the market is expecting more as the economy may weaken more than anticipated and inflation could turn out to be higher.
The Bank of England also kept its policy rate unchanged at 4.5 per cent in its March meeting, factoring in rising global trade uncertainties that escalated into a full scale trade war last week. It had previously cut the policy rate by 25 basis points in February.
There was no surprise in the decision to hold rates, but Bank of England Governor Andrew Bailey was explicit about the rate outlook when he said the Bank still believed rates were “on a gradually declining path”. Economists expect two more rate cuts this year, with the first likely in May. Inflation remains above the 2 per cent target.
China, too, kept its policy rates unchanged in the third week of March, after a 25 basis point cut in October 2024. Its central bank has been balancing a modest pickup in growth with pressure on the currency amid an escalating trade war.
What’s the Reserve Bank of India (RBI) expected to do this week?
First, let’s examine what has changed in India since the February policy announcement.
The Consumer Price Index (CPI) inflation data for March will be released after the policy meeting. In February, it had dropped to a seven-month low of 3.61 per cent, down from 4.31 per cent in January. Food inflation was at its lowest level since May 2023, even as core inflation (non-food, non-oil) edged up.
The CPI trend has been on a downward trend since October, when it hit 6.21 per cent — piercing the upper band of the RBI’s inflation target (4 per cent with a 2-percentage-point margin on either side). It dropped to 5.48 per cent in November and further to 5.22 per cent in December.
Analysts expect CPI to decline further in March to around 3.5 per cent. Overall, for the fourth quarter of FY25, inflation could average below 4 per cent, compared with the RBI’s estimate of 4.4 per cent. For the full year, it is expected to be around 4.6 per cent, again below the RBI’s projection of 4.8 per cent.
Assuming a normal monsoon, a stable rupee, and soft global crude prices, inflation could align with the RBI’s 4.2 per cent estimate for FY26.
The last policy was announced on February 7. On that day, the dollar traded at Rs 87.59. Since then, the rupee has strengthened. Last Friday, it ended at Rs 85.23 to the dollar, after hitting an intraday high of Rs 84.95. The last time the dollar traded below Rs 85 was on December 18, 2024.
Bond yields have also been moving southwards. The 10-year paper yield was 6.7 per cent on February 7. Last Friday, it was 6.47 per cent, below the 6.5 per cent level, last seen in January 2022. At the shorter end, 364-day treasury bill yield dropped from 6.54 per cent to 6.3 per cent during this time.
The most critical change is seen in liquidity. Since mid-December 2024, the system was facing a liquidity shortage, which at one point reached Rs 3.3 trillion. After a little over four months, by April, we’re seeing surplus liquidity — it was around Rs 2.16 trillion last Thursday. As a result, the RBI refrained from conducting a 14-day variable rate repo auction that day.
Against this backdrop, it’s safe to bet on yet another rate cut this week.
In February, the RBI cut the repo rate by 25 basis points (bps) to 6.25 per cent — the first cut since May 2020, when it slashed the rate by 40 bps to 4 per cent amid the Covid crisis. It was also the central bank’s first rate move since February 2023, when the rate had been raised to 6.5 per cent. (One basis point is a hundredth of a percentage point.)
However, there was no change in the monetary policy stance in February; it remained neutral. RBI Governor Sanjiv Malhotra’s first policy also offered no forward guidance. He did, however, commit to providing sufficient liquidity. He said the RBI would monitor evolving liquidity and financial conditions, and take proactive measures to ensure orderly liquidity.
Malhotra has indeed been walking the talk. The RBI has been infusing liquidity through dollar-rupee buy-sell swaps, daily variable rate repo (VRR) auctions of varying tenures, and open market operations (OMOs) — buying government bonds from banks and releasing rupee liquidity.
First, it introduced long-term VRR auctions of 42, 49, and 56 days, infusing Rs 1.83 trillion to ease liquidity deficit. Since January, it has conducted OMOs worth Rs 2.5 trillion. Second, an additional Rs 80,000 crore in OMOs has been announced, to be conducted in phases till April 29.
The third liquidity tool has been three-year dollar buy-sell swaps. Through $25 billion in forex swaps, the RBI has injected about Rs 2.15 trillion into the system.
The RBI is expected to continue deploying different tools to infuse liquidity to ensure the transmission of rate cuts. Post a rate cut without a change in the policy stance, the RBI will keep the door open for either a pause or another rate cut in June.
Changing the stance at the juncture may be unwise when a fierce global trade war is unfolding before us. While its impact on India is still being assessed, the positive signals for now are subdued inflation and the fact that the worst is behind the rupee, at least for the time being.
This has created breathing room for the RBI, despite global uncertainties. It could go for a rate cut, maintain a neutral stance, and keep liquidity taps open until government spending picks up.
In February, the RBI projected India’s real gross domestic product (GDP) growth at 6.7 per cent for FY26. For FY25, it cited the National Statistical Office’s first advance estimate of 6.4 per cent. These projections are unlikely to change at this point.
Since January, central banks in several emerging markets — including Australia, Indonesia, New Zealand, South Korea, Taiwan and Thailand, besides India — have cut policy rates. While New Zealand opted for a 50 bps cut, the others have made 25 bps reductions. This trend is expected to continue.
As headline inflation moves closer to the RBI’s target, and growth momentum remains elusive, the central bank could follow up with more rate cuts. Will it, for sure? Your guess is as good as mine.
he author, a Consulting Editor of Business Standard, is a Senior Advisor, Jana Small Finance Bank.
This column first appeared in Business Standard
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