RBI has room for more rate cuts, but with caution, says MPC member

RBI has infused liquidity worth ₹6.21 lakh crore (about $73 billion) since the start of 2025
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FRANCIS MASCARENHAS

India has room for more rate cuts, given the declining inflation and elevated uncertainties around growth, but any further policy easing should be calibrated and done with caution, an external member of the country’s rate-setting panel said late on Tuesday.

“Going forward, continuing policy easing – both rate cuts and liquidity infusions – could eventually alter the growth-inflation balance, especially as growth recovery begins to approach potential levels, thereby increasing inflationary pressures,” Saugata Bhattacharya said in an interview.

“I think we are still some time away from this,” Bhattacharya said.

India’s Monetary Policy Committee, which consists of three members of the Reserve Bank of India (RBI) and three external members, cut the key repo rate by 25 basis points to 6 per cent earlier in April while changing the stance to “accommodative” from “neutral”. This was the panel’s second rate cut this year.

The RBI also lowered its GDP growth estimate for the current fiscal year to 6.5 per cent from 6.7 per cent amid US tariff policy flip-flops, which have roiled financial markets.

The central bank, under Governor Sanjay Malhotra, who took charge in December, has flooded India’s banking system with liquidity with an aim to boost growth and ensure smooth transmission of policy rates.

The RBI has infused liquidity worth ₹6.21 lakh crore (about $73 billion) since the start of 2025.

It plans to buy bonds worth ₹1.25 lakh crore in May, which is expected to lower the cost of overnight interbank funds, effectively acting as a rate cut, according to analysts.

This “proactive” infusion of cash is likely to assure markets that liquidity will be sufficient, Bhattacharya said.

Surplus liquidity of around 1 per cent of overall deposits, perhaps even slightly higher, might be appropriate during the easing cycle, Bhattacharya said.

“With fresh government spending, system liquidity might even – transitorily – exceed this (1 per cent) level and I am OK with that.”

Unlike interest rates, liquidity is easier to calibrate and reverse, if inflationary pressures build up, he said.

Bhattacharya expects an “accelerated” transmission of rate cuts to consumers within the next two quarters as a majority of bank loans are linked to external benchmarks.

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Published on April 30, 2025