RBI’s monetary policy signals more easing in future

At this point of time, monetary policymakers across the globe are struggling to deal with uncertainty about the state of their respective economies amid the ongoing trade tariff war unleashed by the United States. Global economy went into a tailspin since a broad-based 10 per cent US tariffs took effect on April 5, leading to a massive market sell-off worldwide sparking recession fears.

As of today, the tariffs imposed on Chinese products have reached a staggering 104 per cent. The new tariffs include rates of 26 per cent on India, 20 per cent on the European Union and 49 per cent on Cambodia. In the assessment of the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC), ‘the trade tariff related measures have clouded the economic outlook across regions, posing new headwinds for global growth and inflation.’

MPC’s outlook for domestic growth

While the MPC sees downward risks to India’s economic growth coming from global trade disruptions, its overall tone does not suggest a sense of undue alarm. It has lowered the real GDP growth projection for 2025-2026 (FY2026) by just 20 bps from 6.7 per cent in the February policy review to 6.5 per cent in the latest policy. Its optimism on domestic growth is based on the improved rural demand outlook and the expected but long-awaited revival in the private capex cycle. Increased resilience of services exports has also added to the MPC’s optimism.

MPC’s outlook for domestic inflation

The MPC’s outlook for inflation has also improved as the current headline CPI inflation is below the target supported by a sharp fall in food (primarily vegetables) inflation. The MPC members exude greater confidence of a durable alignment of headline inflation with the target of 4 per cent over a 12-month horizon. Besides their expectations of a durable softening in food inflation, the fall in crude prices to their lowest level in the past four years has also contributed to their inflation related confidence. Hence, the MPC has lowered its inflation forecast for FY2026 by 20 bps from 4.2 per cent in the February policy to 4 per cent in the April policy.

MPC’s monetary policy action

Against the backdrop of benign inflation outlook and increased growth headwinds coming from global uncertainties, the MPC has unanimously reduced the policy repo rate by 25 bps to 6 per cent and changed the policy stance from neutral to accommodative in the latest monetary policy. A change in the policy stance and the overall tone of the policy clearly suggest that the outlook for interest rates looks tilted towards more easing.

RBI’s liquidity injections in February-March

The RBI’s growing comfort on the changing ‘inflation-growth’ dynamics was aptly reflected in its aggressive liquidity injections during February-March 2025. As per the data shared in the governor’s statement, from February onwards it conducted eight Open Market Operation (OMO) purchase auctions injecting Rs 2.85 trillion into the system; three term VRR auctions injecting further Rs 1.83 trillion; three dollar-rupee buy/sell swaps auctions injecting Rs 2.18 trillion so far. Additionally, it has scheduled two more OMO purchase auctions for an amount of Rs 400 billion later in April.

Uncertainty and risks to MPC’s projections

Increased global uncertainty has reduced the attractiveness of emerging market assets. A tendency of global capital to move to the safe-haven assets during uncertain times results in massive capital outflows from the emerging market economies like India.

From October to April, India has witnessed negative FPI investments (in dollar terms) for all the months except for December and March. During the past year, the Indian rupee depreciated by 3.1 per cent. In fact, between April 2024 and March 2025 it depreciated by 4.81per cent, but its disorderly depreciation was controlled by the RBI’s timely interventions in the forex markets.

Given that the ‘import-intensity’ of the Indian manufacturing sector is very high, a rapid depreciation of rupee in an uncertain environment has a high potential to contribute to the overall inflation through a cost-push effect. It is not clear if the MPC’s projection of CPI inflation has factored in the impact of rupee depreciation.

The MPC appears to be sanguine on the food inflation trajectory also. According to the governor’s statement, “the outlook for food inflation has turned decisively positive”.

However, India’s agriculture sector is highly vulnerable to the rising frequency and intensity of extreme weather events. According to a study by the RBI, climate change remains a persistent threat to India’s food inflation trajectory. India’s overdependence on rainfall for agriculture has long been a cause for concern and this issue is further exacerbated by climate change and the growing prevalence of heatwaves.

As per the RBI’s study published in its Monthly Bulletin for August 2024, between 2016 and 2020, India’s average food inflation stood at 2.9 per cent. In the 2020s, it has more than doubled, averaging 6.3 per cent, underscoring how climate events have emerged as the dominant force driving food price increases.

Given the increased global economic uncertainty and climate-related risks, it is difficult to expect the balance of risk for Indian inflation to shift to the lower side over the medium term. Higher liquidity injections amid increasing cost push pressures can give rise to inflation persistence over the medium term.

As stated by the IMF study (March 2024), ‘A robust interest rate approach, characterized by a ‘better safe than sorry’ philosophy, entails incurring a modest cost to safeguard against a protracted period of deviating inflation’.

RBI’s regulatory measures

Besides the monetary measures, the RBI introduced six new regulatory proposals for banks and fintechs to improve the quality of financial intermediation. These are: (1) Securitisation of stressed assets framework to improve risk distribution and offer lenders an exit route; (2) Expanded co-lending guidelines to address evolving credit partnerships across the sector; (3) Uniform regulations for gold-backed loans to harmonise conduct and prudential norms; (4) Revised guidelines for non-fund based facilities like guarantees, letters of credit, and co-acceptances. The review includes updates on partial credit enhancement to boost infrastructure financing; (5) More flexibility granted to the UPI transaction limits, and (6) On tap and theme-neutral regulatory sandbox for fintechs. Under the new system, eligible fintech innovations will be allowed to apply and test their products at any time.

(Rupa Rege Nitsure, an independent economist, is Professor of Practice, Symbiosis School of Economics)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.