7 February 2025- In the inflation-growth trade-off the RBI tilted towards supporting growth by cutting the policy rate by 25bps today. This decision was underpinned by the governor’s emphasis on the “flexibility” in the inflation target framework, a deviation from the previous assertion of reaching the median target of 4% by the central bank.
While the policy rate was reduced, the MPC kept the stance unchanged at neutral. This could imply a more cautious approach towards the extent of rate cuts going forward in this rate cutting cycle.
The stance also suggests that while the central bank is likely to provide sufficient liquidity – both transient and durable — to the system, it has abstained from providing a liquidity bonanza. Therefore, lingering pressures on liquidity could weigh on the transmission process for now.
The pressure on liquidity conditions is anticipated to linger on as we move into the end of the month and year-end drags including advance tax outflows weigh in. We expect this to be met by appropriate liquidity infusion measures including further OMOs, buy/sell swaps and longer duration repos.
The RBI showed confidence in the disinflation process, pegging the inflation rate to average at 4.2% in FY26 while growth is projected to be at 6.7% — which is towards the higher end of the range set out in the economic survey of 6.3-6.8% for FY26.
The governor set out a more balanced approach towards regulations which would strike a balance between the associated benefits and costs. However, it fell short of providing any clarity on the implementation of the new LCR norms.
We expect the RBI to frontload its rate cuts and deliver another rate cut in the April policy of 25bps. The space for rate cuts beyond this would hinge on how domestic and global headwinds pan out.
