The Reserve Bank of India surprised the market by reducing policy rates far below expectations. It also changed its policy tone from one of accommodativeness to that of neutrality.
ING Group believes that the current actions of RBI indicate a possible pause on policy changes.
The possibility of further easing is still open, depending on the potential for a decline in inflation or growth.
The Reserve Bank of India has cut the Repo Rate by 50 basis point (bps), exceeding expectations on the market.
This cut brings the RBI’s total reduction in repo rates in this cycle to 100 basis points, which results in a policy rate real of 2,3%.
RBI has also reduced cash reserve ratios by 100 basis points, to the lowest level since 2021.
In a recent note, Deepali Bhargava said that the RBI’s actions indicate that there is a growing belief within its Monetary Policy Committee, that lower inflation will likely persist and that growth in GDP remains weak.
The RBI is keen to make sure that the lower rate benefits reach the economy, and there is plenty of liquid to keep the things moving.
Rate cuts are not over
The RBI shocked markets when it changed its policy from being ‘accommodative to neutral’.
The shift in policy was unexpected, as it came only two months following the adoption of a more accommodative stance. This marked a major reversal.
Bhargava stated, “This is a very quick U-turn and suggests that the central bank may be finished with interest rate reductions for now.”
Bhargava says that even though the CPI inflation rate is below the RBI target, and the real policy rates are above the comfort zone of around 1.5%, this paradoxically seems counterintuitive.
She said:
The RBI is expected to cut rates by another 25 bps in the fourth-quarter of this year.
The RBI has indicated that it will not be making any further policy changes, but reserves the right to do so if economic growth and inflation fall.
The company has revised its forecast for consumer price inflation from 4,0% to 3,7%, and kept its growth estimate of 6.5% in the GDP for fiscal year ending March 2026.
Bhargava stated that “our own GDP estimates are slightly lower than those of the RBI, but with the real policy rate still well above historic norms we expect a 25bp cut in rates from the RBI this year. This is likely to happen during the 4Q of the current fiscal year.”
Market impact
According to ING, a single interest rate reduction today will not have a significant impact on the Indian Rupee.
It is more likely that this reaction was a result of lowered inflation than a sign of growing concerns.
ING expects market fluctuations. The currency is likely to rise due to the RBI’s emphasis on building up foreign exchange reserves and a slowdown in GDP growth projected because of tariffs, geopolitical concerns, and the RBI focus.
Over the last year, 10-year bond rates have risen by over 100 basis point.
The increase in prices can be explained by a number of factors, including a decline in inflation and an equilibrium favorable between supply and demand.
Bhargava stated that “we still believe the fundamentals are in favor of a continued drop in yields. However, the rate of decline will likely be slower from this point on.”
The shorter end of this curve should maintain strong support due to the abundance of liquidity in the system.
The post RBI neutralizes after rate cuts; ING anticipates another easing in the second half of this year could be updated as new information becomes available
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