Foreign Banks and brokerages see the RBI’s latest measures to ease liquidity conditions as having set the stage for a shallow rate cut cycle at the upcoming February 7 MPC meeting. 

Most foreign banks and brokerages expect the RBI to go in for a 25 basis points cut on February 7. RBI has kept the policy rate unchanged at 6.5 per cent since February 2023. 

Noting that improved liquidity also sets the pace for improved transmission, as the February MPC rate review approaches, Radhika Rao, Executive Director and Senior Economist DBS Group Research said “We expect a 25bp cut at the February meeting, marking a start to the shallow rate cut cycle”. 

She highlighted in a research note that new members of the monetary policy committee—three external members joined on October 24, the new Governor assumed office on December 24, and the Deputy Governor in January 25—have openly conveyed little about their policy bias, though recent actions suggest that the path is being paved for monetary easing.

Aastha Gudwani, India Chief Economist, Barclays Research said “By announcing these measures to address liquidity concerns , the RBI, in our view, is setting stage for monetary easing in the upcoming February policy meeting”. 

Currency volatility measures

Barring any surprises/shocks in the February 1 budget, Barclays Research continues to expect the RBI MPC to announce a 25 basis point policy repo rate cut in the February 7 meeting, alongside more non-rate measures to address the domestic liquidity conditions and smooth INR volatility. 

“With these measures, the RBI has clearly signalled that it is watchful of market conditions and stands ready to respond to the system needs, once the dust settles”, Gudwani added. 

Upasana Chachra, Chief India Economist, Morgan Stanley Research said “We expect the RBI to commence the rate easing cycle with a 25bps rate cut, reflecting the current domestic growth-inflation dynamics”. 

Shallow rate cut cycle

Morgan Stanley Research expects the RBI to embark on a shallow rate easing cycle. The confluence of domestic growth-inflation dynamics – i.e., weaker-than-anticipated growth and a moderating inflation trajectory – warrant rate easing to support growth, Chachra said in a research note. 

However, this is juxtaposed against an adverse external environment, as demonstrated by dollar strength, the Fed’s higher-for-longer stance, and volatility in global capital flows, which lead to currency weakness.

“Therefore, in our base case, we continue to expect a shallow rate easing cycle of a cumulative 50bps, starting from February”, Chachra added. 

In addition, Morgan Stanley Research expects the central bank to add durable liquidity and monitor currency closely to limit excessive volatility.

Liquidity measures

The RBI introduced a slew of measures on Monday to ease the liquidity crunch in the banking system (and core balance). 

Steps include plans to a) conduct open market operations purchases worth ₹60,000 crore in three tranches beginning January 30 (tenor mix signals durable liquidity infusion); b) 56-day variable rate repo (VRR) auction worth ₹50,000 crore on February 7 (same day as the rate meeting); c) USD/INR buy/sell swap auction of $5bn for a tenor of six months on January 31 (will cover periodic outflows). 

The steps taken earlier included a mix of daily VRR auctions and secondary market OMOs. Persistent unsterilised dollar sales to defend the currency and seasonal drivers had magnified the liquidity squeeze, with the deficit widening sharply to ₹3 lakh crore in recent sessions. 

Published on January 28, 2025