Morgan Stanley anticipates that the Reserve Bank of India (RBI) will implement additional liquidity measures by the end of March, followed by another 25 basis points (bps) cut in the repo rate in April. This follows the RBI’s recent decision to reduce the policy rate by 25 bps to 6.25%, while maintaining a neutral stance.
In a unanimous decision, the Monetary Policy Committee (MPC) has initiated a rate easing cycle, which was expected by Morgan Stanley and other analysts. The MPC retained a neutral stance, emphasizing its commitment to aligning inflation with targets while supporting economic growth, as per Morgan Stanley’s report.
The current growth-inflation dynamics provide the MPC with the policy space to support growth while ensuring inflation targets are met. Although no additional liquidity-enhancing measures were announced in the latest policy update, the Governor hinted at providing “sufficient” liquidity and taking “proactive” steps to maintain liquidity levels, according to the report.
The recent rate cut aligns with expectations, given the weaker-than-anticipated domestic growth trends and moderating inflation. The RBI has already added liquidity worth approximately $18 billion while signaling a softer approach towards some upcoming regulations.
Morgan Stanley believes that the RBI is fostering growth through rate easing, deferred regulations, and ample liquidity provisions. They predict another 25 bps rate cut in the April policy review, which could be the final cut in this cycle.
Additionally, the report suggests that the RBI is likely to manage liquidity proactively and consider further measures like Open Market Operations (OMO) purchases and foreign exchange swaps as the liquidity deficit rises by the end of March. Morgan Stanley cautions that a prolonged rate cut cycle may be necessary if domestic demand remains weak and global uncertainties persist.
The report also highlights the RBI Governor’s comments on the regulatory front, noting the trade-off between stability and efficiency, which will be considered in future regulatory formulations.
