RBI may continue to be on its rate-cut spree in future too

The Reserve Bank of India has cut its key repo rate, the rate at which the RBI lends money to commercial banks by 25 basis points on Friday last. Moreover, it has left the door open for further rate easing in view of its ongoing efforts in boosting banking-sector liquidity by up to $16 billion to support a ‘goldilocks’ economy, as explained by the RBI governor, Sanjay Malhotra, in his media briefing, immediately on conclusion of the three-day MPC meet.

The reason is not far to seek for the country which is under pressure from punitive tariffs imposed by US President Donald Trump, widening its trade deficit and pushing its currency to a record low.

The RBI's six-member monetary policy committee voted unanimously to lower the repo rate to 5.25 per cent, and maintained a ‘neutral’ stance, giving a signal for future rate cuts.

The central bank has already cut rates by a total of 125 basis points since February, the most aggressive easing since 2019.

The RBI also decided to conduct open market operations of 1 trillion rupees to buy bonds this month, and another $5 billion in forex swaps to add liquidity to the banking system and speed up transmission of lower rates.

The central bank raised its GDP forecast for the current year to 7.3 per cent from its previous estimate of 6.8 per cent while the inflation projection was lowered to 2 per cent versus 2.6 per cent in October.

On the other hand, retail inflation stood at an all-time low of 0.25 per cent in October and is expected to remain soft in the coming months too.

The announced primary liquidity infusion of Rs1.45 trillion, including Rs1 trillion of OMOs and a $5 billion buy–sell swap, is constructive, as per Emkay, albeit modestly below its expectation of Rs 2 trillion for the remaining part of the current fiscal.

Even so, this injection should meaningfully aid transmission, particularly as unsterilized foreign exchange intervention is likely to continue, making the liquidity support especially timely and effective at this stage of the cycle.

Not to mention, the rate cut decision will supplement the government’s recent initiatives like GST rationalization, tax breaks and notification of labour codes to minimize the adverse impact of global headwinds.

While there is usually a lag in transmission of repo rate cuts to loan rates, over a period of a few months, it does translate into lower interest payments.

A cut in this rate makes borrowing cheaper for banks. The RBI's intention is for this reduced cost of borrowing to be passed on to the end consumer in the form of lower lending rates.

For a significant section of the population, the RBI rate cut signals a much-anticipated financial breather. The immediate and most positive impact will be felt by individuals with home loans, auto loans, and other retail loans linked to repo rate.

EoM.