RBI Monetary Policy: RBI changes policy stance and lowers rate

As widely expected, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) lowered the repo rate by 25 basis points to 6.0%-its second consecutive rate cut. More importantly, the RBI changed its stance from neutral to "accommodative", supported unanimously all by committee members. This decision comes against a backdrop of global uncertainty given the tariffs implemented by the US government across countries leading to a sell-off in equities globally and weak sentiment. The central bank's change in stance is suggestive of proactively supporting growth given the challenges that could be faced in such an environment and could imply a deeper rate cut cycle.

We view both the rate cut and change in stance as a positive development. The global scenario has been changing rapidly, with expectations of slowing growth rippling through most countries alike. While uncertainty will continue in the short term given the implementation of reciprocal tariffs and counter measures by other countries (China already engaged in tariff countermeasures with the US), we think the RBI will be proactive in its stance of disinflation and supporting growth.

On the liquidity front, no measures were announced which was expected. The magnitude of liquidity measures announced by the RBI in the last four months have been unprecedented and only implemented earlier during Covid. We believe the RBI's strategy is to maintain liquidity at 1% of NDTL to ensure effective transmission and with the upcoming RBI dividend in June, this can go beyond 1% of NDTL which will bring down yields at the shorter end of the curve.

Banking liquidity was in deficit during the second half of December due to the combined impact of advance tax payments, capital outflows and currency leakage and remained in deficit for most of March. The RBI's slew of measures ? Open Market Operations (OMOs) purchases, USD/INR Buy/Sell swaps and long term VRRs ?injected durable liquidity into the system. Consequently, system liquidity turned into surplus at end-March, after a gap of more than 3 months. In April, the central bank will infuse liquidity into the system by way of open market operations (OMOs) worth Rs 80,000 cr. This will be carried out in four tranches of Rs 20,000 cr each, on April 3, April 8, April 22 and April 29. This would take cumulative OMO purchases by the RBI in 2025 to Rs 3,300 bn. In totality, the measures announced and carried out so far amount to Rs 8 lac cr.

All this liquidity infusion has resulted in yields at the shorter end of the curve falling by 50-100 bps. We believe that post the rate cut today, the next trigger is likely to be deposit rate cuts from the banks. It is worth noting that after the rate cut in February, banks had lowered deposit rates by a small margin.

Liquidity moves to surplus end of March 2025

Repo rate cut, CRR unchanged

Policy Decision

• Repo rate lowered by 25 bps to 6.0%


• SDF rate now at 5.75% and MSF rate & bank rate at 6. 25%


• CRR unchanged at 4%


• All members unanimously voted for an interest rate cut


• All members decided unanimously "to change stance from neutral to accommodative" focusing on durable alignment on inflation with the target while supporting growth"

Growth estimates cut while inflation projections remain lower

The MPC observed that GDP growth might be sluggish due to recent tariffs on all countries, which have clouded the economic outlook. Additionally, slower global growth is expected to have a ripple effect on India. However, we believe that despite expectations of lower growth, India is well-positioned among emerging markets due to its relatively lower tariffs. The Indian economy is primarily domestic driven, with exports constituting a small portion of GDP, making it less susceptible to global trade disruptions. On a positive note, inflation is anticipated to remain below 4% for most periods.

The seasonal correction in vegetable prices, the significant drop in crude oil prices, and expectations of a favorable monsoon have positively influenced the inflation outlook. The sharp decline in inflation expectations for the three-month and one-year ahead periods will help anchor inflation expectations moving forward. However, headwinds from tariffs and financial market volatility could impact growth. Accordingly, the growth and inflation numbers have been revised lower as below.

Source: RBI Governor's Statement dated 9^th April 2025

Market Reaction

The repo rate cut was on expected lines but the change in stance was expected by a small segment of the markets. The central bank has been proactively managing liquidity and had already announced measures so there were no expectations on this front from the policy. We agree with the RBI's projection of disinflation and lower growth. In fact, the RBI has prioritized growth and is likely to support economy proactively. This combination of liquidity, rate cut and change in stance will keep the bond market happy. Yield across the curve fell 3-5 bps after the rate action.

Our View

Policy commentary is in line with our view. The tariff uncertainty has been one of the key points to lookout for over the short term. Liquidity is now in surplus given the actions taken by the RBI. We expect liquidity to further increase over the next few months. Announcement of RBI dividend by June 2025 to the tune of Rs 2.5 trillion would be another big boost to core / durable liquidity and hence we believe core/ durable liquidity to remain in surplus from April 2025 for H1 FY 2025-26. Positive liquidity augurs well for short end of the curve and we expect the curve to get steeper over the next 6 months as compared to flat/invert yield curve.

The change in stance is a big positive and provides the central bank flexibility to monitor the progress and outlook on disinflation and growth and act appropriately whenever needed. Directionally we see yields for the 10-year Gsec to trade in a range of 6.25%-6.40% in the next 6 months.

Rate cuts of 50 bps have been delivered so far and we expect another 25 bps in June and a pause thereafter. However, if the tariffs linger for long we could see further cuts of 25-50 bps.

Global economic outlook

Given the uncertainty on tariffs, expectations are for growth in the US to slow down and inflation to run high. The US Federal Reserve has indicated 2 rate cuts this year, which is in sync with our view of 50-75 bps in this interest rate cycle. This is our base case scenario. However, the tariffs could lower growth and this could mean rate cut cycle of 75-100 bps.

Risks to our view

We see currency and growth to be the near term issues. India could be impacted by lower flows, weak growth and high inflation and also by a China rebound.

Allocation and strategy is based on the current market conditions and is subject to changes depending on the fund manager's view of the markets. Data as on 31 March 2025.

#Duration as of 28 February 2025

Product Labelling

DISCLAIMER

Source of Data: RBI Governor' Statement, RBI Monetary Policy Statement & RBI post policy press conference dated 9^th April 2025, Axis MF Research

Disclaimer: This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s).

Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.