Bank Nifty surged on hopes of another 100 bps  cut by the RBI

·       Also, upbeat report cards by Indian private bank majors like HDFC, ICICI, IndusInd, and Kotak Bank helped Bank Nifty to scale a new life time high

·       Nifty surged on hopes of a less hawkish Trump tariff policy on India, but Trump tariff uncertainty remains; India may have to cut tariffs and GST drastically.

·       The RBI may now prioritize economic growth over inflation management under an accommodative stance

·       India’s core and total inflation stabilizes around 4.0% targets, while real GDP dipped from around 8.9% average growth post-COVID to 6.5% in FY25.

·       The RBI is also concerned about Trump's trade war tantrum on India’s economic growth to some extent

On April 9, 2025, as highly expected, RBI, India’s Central Bank cut all its key lending rates by 25 bps and officially changed its stance from neutral to accommodative. RBI, under the new Governor Malhotra, resumed cutting rates from February 2025, for the 1st time since COVID (2020). RBI kept repo rates at 6.50% since February 2023 under previous Governor Das due to elevated and sticky inflation (total CPI) of 5.0% on average against RBI’s target of 4.0%.

Although India’s core CPI was substantially below 4.0% in 2024 and total CPI was above 5.0% due to double-digit food inflation, RBI, under Das didn’t cut rates as officially, RBI has the single mandate of price stability –inflation –total CPI target, not core CPI. Although Goyal, an influential weight Minister of Commerce (Modi admin) criticized Das publicly for not following core CPI in line with global norms, Das was adamant in his hawkish hold stance and held rates too high for too long, which may be blamed one of the primary reasons behind India’s economic slowdown in late 2024.

Das was subsequently not given his 3rd extension as RBI Governor, but due to his proximity with the PMO and an excellent track record as an Indian Bureaucrat and RBI Governor, he was eventually appointed as 2nd Principal Secretary of PM Modi. Das’s handling of monetary policies was excellent during COVID times and subsequently during 2022-23 rate hikes to bring down inflation. But unlike developed economies such as in the US, EU, or China India’s inflation, especially on food is often driven by supply shock due to various reasons including adverse weather and regulations, rather than too much demand, which RBI needs to control with monetary policy tightening and higher borrowing costs.

Also, India has a large informal economy coupled with widespread corruption involving public money and government fiscal stimulus. This, along with the steady devaluation of the local currency (INR) and the Goldinization of the economy, RBI’s monetary policy has been largely ineffective in controlling India’s inflation for decades after decades. This is a legacy issue, not a particular RBI governor.

Due to excessive Government spending, fiscal stimulus leakage cut money. Corruption involving various infra projects, a large section of the Indian population does not need to borrow money to support consumption, and thus RBI policy is largely ineffective. Also, most of the Indian banks & financials are now too worried about the return of capital rather than return on capital and thus lend to only qualified eligible borrowers irrespective of RBI policy. RBI also does not encourage excessive lending proactively and always keeps an owlish stance, warning banks. Thus, India’s core inflation largely hovers around 4.0% to 5.0%, even when RBI cuts rate.

Due to its huge population of almost 1.45 billion with a relatively younger demography, the demand is always high and increasing against a constrained or limited supply of the economy, especially for food items, which is a basic necessity. The government should have ensured higher supply through proper policy reform, deregulation, and lower taxation. As a central bank, RBI has the tool to control the demand side of the economy to manage inflation, not the supply side, which is solely the responsibility of the government (fiscal side action).

RBI cuts rate by 25 bps in April’25 policy meeting back to back after February cut

On April 9, 2025, the Reserve Bank of India (RBI) cut its key repo rate by 25 bps to 6.00% in line with market expectations. The latest rate cut brings borrowing costs to their lowest level since November 2022, driven by easing inflation, slowing economic growth, and escalating Trump trade war tensions and global economic & trade fragmentations. The RBI also slashed the standing deposit facility (SDF) or the effective reverse repo rate by 25 bps to 5.75% and the marginal standing facility (MSF) and bank rates to 6.25%, while keeping the cash reserve ratio (CRR) steady at 4.00% following a 50 bps cut in December’24 to ease constrained banking liquidity (after the Q3FY25 GDP shocker).

RBI projected a near stagnation-like economic scenario for FY26

In April’25, the RBI projected India’s FY26 economic outlook as:

·       Real GDP growth: 6.5% vs 6.7% prior estimate and FY25 estimate 6.5%

·       Total CPI: 4.0% vs 4.2% prior estimate

Full text of RBI Monetary Policy statement: 9th April 2025

“Monetary Policy Statement, 2025-26 Resolution of the Monetary Policy Committee April 7 to 9, 2025

Monetary Policy Decisions

The Monetary Policy Committee (MPC) held its 54th meeting from April 7 to 9, 2025 under the chairmanship of Shri Sanjay Malhotra, Governor of, the Reserve Bank of India. The MPC members Dr. Nagesh Kumar, Shri Saugata Bhattacharya, Prof. Ram Singh, Dr. Rajiv Ranjan, and Shri M. Rajeshwar Rao attended the meeting.

After assessing the current and evolving macroeconomic situation, the MPC unanimously voted to reduce the policy repo rate by 25 basis points to 6.00 percent with immediate effect. Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) shall stand adjusted to 5.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25 percent. This decision aligns to achieve the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth.

Growth and Inflation Outlook

The global economic outlook is fast changing. The recent trade tariff-related measures have exacerbated uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation. Financial markets have responded through a sharp fall in dollar index and equity sell-offs with significant softening in bond yields and crude oil prices.

The National Statistics Office (NSO) has estimated real Gross Domestic Product (GDP) growth at 6.5 percent for 2024-25, on top of 9.2 percent in 2023-24. Going forward, sustained demand from rural areas, an anticipated revival in urban consumption, expected recovery of fixed capital formation supported by increased government capital expenditure, higher capacity utilization, and healthy balance sheets of corporates and banks are expected to support growth.

Merchandise exports would be weighed down by the evolving global economic landscape which appears to be uncertain at the current juncture, while services exports are expected to sustain the resilience. On the supply side, while agricultural prospects appear bright, industrial activity continues to recover, and the services sector is expected to be resilient. Headwinds from global trade disruptions continue to pose downward risks.

Taking all these factors into consideration, real GDP growth for 2025-26 is now projected at 6.5 percent, with Q1 at 6.5 percent; Q2 at 6.7 percent; Q3 at 6.6 percent; and Q4 at 6.3 percent. The risks are evenly balanced.

CPI headline inflation declined by a cumulative 1.6 percentage points during January-February 2025, from 5.2 percent in December 2024 to a low of 3.6 percent in February 2025. On the back of a strong seasonal correction in vegetable prices this year, food inflation dropped to a 21-month low of 3.8 percent in February. The fuel group continued to remain in deflation. Core inflation, after remaining steady in December 2024-January 2025, inched up to 4.1 percent in February 2025, driven primarily by a sharp pick-up in gold prices.

The outlook for food inflation has turned decisively positive. There has been a substantial and broad-based seasonal correction in vegetable prices. The uncertainties on Rabi crops have abated considerably and the second advance estimates point to a record wheat production and higher production of key pulses over last year. Along with robust kharif arrivals, this is expected to set the stage for a durable softening in food inflation. The sharp decline in inflation expectations for three months and one year ahead period would help anchor inflation expectations going ahead. Furthermore, the fall in crude oil prices augurs well for the inflation outlook. Concerns about lingering global market uncertainties and the recurrence of adverse weather-related supply disruptions pose upside risks to the inflation trajectory.

Taking all these factors into consideration, and assuming a normal monsoon, CPI inflation for the financial year 2025-26 is projected at 4.0 percent, with Q1 at 3.6 percent; Q2 at 3.9 percent; Q3 at 3.8 percent; and Q4 at 4.4 percent. The risks are evenly balanced.

The rationale for Monetary Policy Decisions

The MPC noted that inflation is currently below the target, supported by a sharp fall in food inflation. Moreover, there is a decisive improvement in the inflation outlook. As per projections, there is now greater confidence in a durable alignment of headline inflation with the target of 4 percent over a 12-month horizon.

On the other hand, impeded by a challenging global environment, growth is still on a recovery path after an underwhelming performance in the first half of 2024-25. While the risks are evenly balanced around the baseline projections of growth, uncertainties remain high in the wake of the recent spurt in global volatility. In such challenging global economic conditions, the benign inflation and moderate growth outlook demand that the MPC continues to support growth.

Accordingly, the MPC unanimously voted to reduce the policy repo rate by 25 basis points to 6.00 percent. Moreover, it also decided to change its stance from neutral to accommodative. However, it noted that the rapidly evolving situation requires continuous monitoring and assessment of the economic outlook.

The minutes of the MPC’s meeting will be published on April 23, 2025.

The next meeting of the MPC is scheduled from June 4 to 6, 2025.”

Full text of RBI Governor Malhotra’s prepared MPC statement: 9th Apr’25

“This was the 54th meeting overall and the first meeting in the financial year 2025-26 of the MPC. The year has begun on an anxious note for the global economy. Some of the concerns about trade frictions are coming true, unsettling the global community. We, at the Reserve Bank, while remaining alert to these global developments, began the year celebrating the completion of 90 years of this august institution since its establishment on 1st April 1935. The Reserve Bank’s journey over the last nine decades is closely intertwined with the nation’s development and progress. As a custodian of monetary and financial stability, the Reserve Bank has evolved over the years into a full-service central bank with varied functions facilitating a market economy.

The Monetary Policy Committee (MPC) met on the 7th, 8th, and 9th of April to deliberate and decide on the policy repo rate against the backdrop of a challenging global environment. The global economic outlook is fast changing. The recent trade tariff-related measures have exacerbated uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation. Amidst this turbulence, the US dollar has weakened appreciably; bond yields have softened significantly; equity markets are correcting; and crude oil prices have fallen to their lowest in over three years. Under these circumstances, central banks are navigating cautiously, with signs of policy divergence across jurisdictions, reflecting their domestic priorities.

The Indian economy has made steady progress towards the goals of price stability and sustained growth. On the inflation front, while the sharper-than-expected decline in food inflation has given us comfort and confidence, we remain vigilant to the possible risks from global uncertainties and weather disturbances. Growth is improving after a weak performance in the first half of the financial year 2024-25, although it remains lower than what we aspire for.

Decisions of the Monetary Policy Committee (MPC)

After a detailed assessment of the evolving macroeconomic and financial conditions and outlook, the MPC voted unanimously to reduce the policy repo rate by 25 basis points to 6.00 percent with immediate effect; consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) shall stand adjusted to 5.75 percent and the marginal standing facility (MSF) rate and the Bank Rate to 6.25 percent.

I shall now briefly set out the rationale for these decisions. The MPC noted that inflation is currently below the target, supported by a sharp fall in food inflation. Moreover, there is a decisive improvement in the inflation outlook. As per projections, there is now greater confidence in a durable alignment of headline inflation with the target of 4 percent over a 12-month horizon.

On the other hand, impeded by a challenging global environment, growth is still on a recovery path after an underwhelming performance in the first half of 2024-25. In such challenging global economic conditions, the benign inflation outlook and moderate growth demand that the MPC continues to support growth. Accordingly, the MPC unanimously voted to reduce the policy repo rate by 25 basis points to 6.0 percent. Moreover, it also decided to change its stance from neutral to accommodative. It also noted that the rapidly evolving situation requires continuous monitoring and assessment of the economic outlook.

Let me dwell a little on the monetary policy stance. From a cross-country perspective, monetary policy stance is typically characterized as accommodative, neutral, or tightening. While an accommodative stance entails easy monetary policy that is geared towards stimulating the economy through softer interest rates; tightening refers to contractionary monetary policy whereby interest rates are hiked to restrain spending and curb economic activity, all to rein in inflation.

A neutral stance is typically associated with a state of the economy that neither calls for stimulating economic activity nor calls for controlling inflation by curtailing demand and provides flexibility to move in either direction based on evolving economic conditions.

In our context, the stance of monetary policy signals the intended direction of policy rates going forward. Accordingly, concerning the policy rate, which is the mandate of the MPC, today’s change in stance from ‘neutral’ to ‘accommodative’ means that going forward, absent any shocks, the MPC is considering only two options – status quo or a rate cut.

Let me also clarify that the stance should not be directly associated with liquidity conditions. While liquidity management is important for monetary policy including decisions related to policy rate, it is an operating tool with the RBI for various purposes including monetary policy transmission. Monetary policy decisions to change policy rates do however have implications for liquidity management, being the operational tool to carry out the policy changes.

To summarize, our stance provides policy rate guidance, without any direct guidance on liquidity management. I will discuss our approach to the management of liquidity a little later.

Assessment of Growth and Inflation

Impact of Global Trade and Policy Uncertainties on Growth and Inflation

Before I share our assessment of growth and inflation, a few words on the implications of the recent global trade and related policy uncertainties are in order. Let me first highlight the possible implications for growth.

First and foremost, uncertainty in itself dampens growth by affecting the investment and spending decisions of businesses and households.

Second, the dent in global growth due to trade frictions will impede domestic growth.

Third, higher tariffs shall harm net exports.

There are, however, several known unknowns - the impact of relative tariffs, the elasticities of our export and import demand; and the policy measures adopted by the Government including the proposed Foreign Trade Agreement with the USA, to name a few. These make the quantification of the adverse impact difficult.

The risks to inflation, on the other hand, are two-sided. On the upside, uncertainties may lead to possible currency pressures and imported inflation. On the downside, the slowdown in global growth could entail further softening in commodity and crude oil prices, putting downward pressure on inflation. Overall, while global trade and policy uncertainties shall impede growth, its impact on domestic inflation, while requiring us to be vigilant, is not expected to be of high concern.

Growth

Real GDP is estimated to grow at 6.5 percent in 2024-25 on top of a 9.2 percent growth rate observed in the previous year. In 2025-26, prospects of the agriculture sector remain bright on the back of healthy reservoir levels and robust crop production. Manufacturing activity is showing signs of revival4 with business expectations remaining robust5, while services sector activity continues to be resilient.

On the demand side, bright prospects of the agriculture sector bode well for rural demand which continues to be healthy, while urban consumption is gradually picking up with an uptick in discretionary spending. Investment activity has gained traction8 and it is expected to improve further on the back of sustained higher capacity utilization; the government’s continued thrust on infrastructure spending; healthy balance sheets of banks and corporates, along the easing of financial conditions. Merchandise exports will be weighed down by global uncertainties, while services exports are expected to remain resilient. Headwinds from global trade disruptions continue to pose downward risks.

Taking all these factors into consideration, real GDP growth for 2025-26 is now projected at 6.5 percent, with Q1 at 6.5 percent; Q2 at 6.7 percent; Q3 at 6.6 percent; and Q4 at 6.3 percent. While the risks are evenly balanced around these baseline projections, uncertainties remain high in the wake of the recent spike in global volatility. It may be noted that the growth projection for the current year has been marked down by 20 basis points relative to our earlier assessment of 6.7 percent in the February policy. This downward revision essentially reflects the impact of global trade and policy uncertainties, which I had highlighted earlier.

Inflation

Headline inflation moderated during January-February 2025 following a sharp correction in food inflation. The outlook for food inflation has turned decisively positive. The uncertainties regarding Rabi crops have abated considerably and the second advance estimates point to a record wheat production and higher production of key pulses over that last year. Along with robust kharif arrivals, this is expected to set the stage for a durable softening of food inflation.

The sharp decline in inflation expectations in our latest survey for three months and one year ahead would also help anchor inflation expectations, going ahead. Furthermore, the fall in crude oil prices augurs well for the inflation outlook. Concerns about lingering global market uncertainties and the recurrence of adverse weather-related supply disruptions, however, pose upside risks to the inflation trajectory.

 Taking all these factors into consideration, and assuming a normal monsoon, CPI inflation for the financial year 2025-26 is projected at 4.0 percent, with Q1 at 3.6 percent; Q2 at 3.9 percent; Q3 at 3.8 percent; and Q4 at 4.4 percent. The risks are evenly balanced.

External Sector

India’s services exports remained resilient in February 2025, driven by software, business, and transportation services. Going forward, net services and remittance receipts are expected to remain in large surplus, partly offsetting the trade deficit. The CAD for 2024-25 and 2025-26 are expected to remain well within the sustainable level.

On the financing side, gross foreign direct investment (FDI) remained strong from April 24 to January 25 in 2024-25 reflecting India’s strong macroeconomic fundamentals. Net FDI however moderated sharply during this period due to higher repatriations and outward FDI. Net FPI inflows to India stood at 1.7 billion US dollars during 2024-25, supported by debt inflows as the equity segment recorded net outflows. External commercial borrowings and non-resident deposits, on the other hand, witnessed higher net inflows compared to last year.

As of 4th April 2025, India’s foreign exchange reserves stood at 676.3 billion US dollars, providing an import cover of about 11 months. Overall, India’s external sector remains resilient as key indicators stay robust.

Liquidity and Financial Market Conditions

System liquidity was in deficit in January 2025 with net injection under the liquidity adjustment facility (LAF) scaling a peak of ₹3.1 lakh crore on 23rd January 2025. However, as a result of a slew of measures injecting liquidity of about 6.9 lakh crore rupees, the system liquidity deficit tapered during February-March 2025 and further turned into a surplus on 29th March 2025. Coupled with government spending picking up pace during the latter half of March, system liquidity further improved and it stood at a surplus of ₹1.5 lakh crore as of 7th April 2025.

Reflecting these developments, the weighted average call rate (WACR) softened and remained near the repo rate since the last policy meeting. The spreads of 3-month CP and 3-month CD rates over 91-day Treasury bill rate have also softened since the second half of March, suggesting improvement in liquidity conditions.

The Reserve Bank is committed to providing sufficient system liquidity. We will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure adequate liquidity.

Financial Stability

Financial soundness parameters of the banking sector continue to be robust. The liquidity buffer in the banking system is well above the regulatory threshold. Profitability indicators are also healthy reflecting robust operational efficiency of the system. Similarly, the system-level parameters of NBFCs too are sound.

Additional Measures

I shall now announce six additional measures related to banking regulation, fintech, and payment systems.

First, it is proposed to enable securitization of stressed assets through a market-based mechanism. This is in addition to the existing ARC route under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

Second, the extant guidelines on co-lending are presently applicable only to arrangements between banks and NBFCs. Moreover, they are restricted to priority sector loans. To exploit the huge potential of such lending arrangements, it is proposed to extend them to all regulated entities and all loans – priority sector or otherwise.

Third, loans against the collateral of gold jewelry and ornaments, commonly known as gold loans, are extended by regulated entities for both consumption and income-generation purposes. In order to harmonize guidelines across various types of regulated entities, to the extent possible, keeping in view their differential risk-bearing capabilities, we shall issue comprehensive regulations on prudential norms and conduct related aspects for such loans.

Fourth, to harmonize the regulations governing non-fund-based facilities across regulated entities, we propose to issue comprehensive guidelines. Instructions related to partial credit enhancement (PCE) by regulated entities are also proposed to be revised. This is expected to broaden the funding sources for infrastructure financing.

The draft of these four guidelines and regulations is being published today for public consultation. We shall finalize these guidelines based on the feedback received.

The other two announcements relate to enabling NPCI to decide, in consultation with the banks and other stakeholders, the transaction limits in UPI for a person to merchant transactions; and making the Regulatory Sandbox theme-neutral and ‘on-tap’. Necessary directions for the implementation of these two measures shall be issued separately.

Concluding Remarks

The global economy is going through a period of exceptional uncertainties. The difficulty of extracting signals from a noisy and uncertain environment poses challenges for policymaking. Nevertheless, monetary policy can play a vital anchoring role in ensuring that the economy remains on an even keel.

In our context, as I mentioned earlier, the domestic growth-inflation trajectory demands monetary policy to be growth-supportive, while being watchful on the inflation front. We are aiming for non-inflationary growth that is built on the foundations of an improved demand and supply response and sustained macroeconomic balance. As before, we shall remain agile and decisive in our response and put in place policies that are clear, consistent, and credible and in the best interest of the economy.”

Highlights of comments by RBI Governor Malhotra in the RBI Presser on April 9, 2025

·       Trump trade war and its impact on the global & Indian economy: RBI is concerned more about GDP growth than inflation for India

·       Global GDP may be impacted by -0.3% as a result of Trump trade war tensions.

·       India is not an export-oriented economy and overall export is only around 12% of GDP, with US exports at 1%-2%; thus India may be affected much less than some other export-oriented countries like China, Germany, EU, Vietnam, Taiwan, and Mexico.

·       India has some comparative advantage in the Trump trade war scenario vis-à-vis other export-oriented economies.

·       RBI is not targeting any specific USDINR levels; RBI only intervenes in the market, when there is excessive volatility (on both sides) or some disruptive action & correction; RBI does not intend to manage currency actively

·       INR is quite resilient despite Trump trade war tantrum

·       RBI is cognizant of the fact that the Trump trade war may also affect the Indian economy, especially on the economic growth front; but RBI will eventually consider domestic inflation and growth trajectory in support of its policy rate action

·       RBI is comfortable with real rate levels of 1.5% (1.1%-1.9%) and in the current accommodative mode, may bring down rates gradually as per current and evolving macro-economic and geo-political, trade war/truce situations

·       RBI will ensure sufficient system (banking) liquidity irrespective of policy rate action

·       RBI will also try its best to ensure overnight call money rate stays around the repo/reverse rate, which is the main target of monetary policy

·       RBI thinks sufficient system liquidity will ensure a speedy transmission of rate cuts into the real economy

·       RBI is now not too concerned about the CD (credit-deposit) ratio; banks are managing it as per their business model and the 70-75% CD ratio standard may change; RBI will ensure sufficient liquidity/lending in the productive sector of the economy as par growth-oriented budget or strategy of the government

·       RBI recently hiked the risk weight for the unsecured personal loan to 125% from 100%, while keeping 100% for secured personal loans in line with pre-COVID standard

·       RBI will soon issue a guideline for gold loans to harmonize the whole process; it’s not aimed at tightening

·       Overall Indian scheduled commercial and even NBFCs are robust and resilient (even after the recent Indusind Bank fiasco)

·       India is a country with a large number of cooperative banks, and NBFCs. And out of that only a minuscule had failed or rather than faced some events in the last ten years, which is quite normal; but at the system level, RBI is trying to ensure no such event through its regulations and compliance system

·       RBI will not comment about any specific entity (Indusind Bank) but is cognizant of the issue and taking proactive measures for the interest of the customers and overall system

·       Despite surplus banking liquidity, one particular bank has approached RBI for funds in the VRR window; overall banks are lending to each other in the money market, which is normal that RBI always prefer

·       RBI assumed an average USDINR rate of around 86 for its inflation and GDP growth projection

·       RBI is cognizant of any adverse effect of the Trump trade war on INR but expects orderly movement of Rupee because of strong Indian macros (fundamentals)

·       A banking liquidity surplus of around Rs.1.5 trillion at present is not large and manageable for the RBI

·       Overall, the Indian banking sector including UCBs (Urban Cooperative Banks), is quite strong and also robust in the regulatory capital aspect, and thus despite some recent unwanted phenomena, the public need not be worried; their deposits are safe.

Conclusions

RBI is now cutting rates as headline CPI dips below 4% targets, while India’s economic growth suffered some setbacks in the last two quarters and may face more setbacks due to a potential Trump trade war tantrum. India’s 3-month moving average (3MRA) of CPI is now around 3.7%, while core CPI is 3.9%. The recent uptick in core CPI is mainly due to higher Gold, while the sudden slump in total CPI is due to a seasonal fall in food/vegetable inflation from very high prices.

Looking ahead, RBI thinks that India’s headline and also core inflation should be around the 4.0% target on a durable basis. However economic growth may be affected negatively due to Trump's trade & tariff war. However, RBI thinks that India may be less affected by to Trump trade war as, unlike China, India is not an export-heavy economy. But as a proactive measure, RBI may now cut rates in every meeting in June, August, October and December by 25 bps for a cumulative 150 bps rate cut in 2025. RBI, under Governor Das, may have made a policy mistake by not cutting rates in H2CY24 despite India’s core CPI hovering around 3.3% and the Fed and ECB cutting rates proactively in anticipation of the Trump trade war. Thus RBI, under new Governor Malhotra may not front load rate cuts amid a high potential synchronized global Trumpcession and cut rates by 150 bps in CY25 or FY: 25-26.

India’s unemployment rate remains around 8.0% and its total CPI is 5.0% on average for the last 20 years.

India’s real GDP growth is now also slowing towards a long-term trend of 6.0% from the 8.8% average in the last three years (post-COVID). Indian economy needs to grow at least 10.0% in real terms so that the headline unemployment rate falls below 5% on a durable basis from the present 8.0%.

The Government should ensure proper core CPI and employment data and give RBI, and the Fed the dual mandate of maximum employment (say 95% of the labor force) and minimum price stability (say 3.0% core CPI target).

As per the modified Taylor rule, considering RBI’s target of 1.50% real rate, core CPI target of 4.0%, real GDP growth of 6.0%, and assuming an unemployment rate target of 5.0%, RBI should bring down its repo rate to around 5.0% from 6.0% at present. RBI always blames global headwinds for any potential impact on India’s GDP growth and generally maintains local (Indian) tailwinds.

RBI, especially under Modi admin, never finds any faults in India’s domestic economy. But GDP savvy Modi admin and also RBI should now look into the employment situation in the country as headline unemployment remains around 8.0%, while youth unemployment, underemployment, and disguised unemployment are much more. Almost 42% of India’s educated youths are unemployed (below 25 years of age), indicating a significant mismatch in skills and jobs available. Although employment is primarily a fiscal policy issue, as a central bank, RBI should also maintain stable lower prices for maximum employment (like the US Fed).

Lower price stability and higher real income will ensure higher discretionary consumer spending, which will result in higher private capex or business investments and quality jobs. India’s GDP growth is too dependent on higher government spending & consumption, while private consumption and capex growth remain weak. RBI and also the government should focus on core GDP data (Private consumption + Investment/CAPEX) without cheerleading about headline GDP growth. India’s government spending is increasing along with an alarming pace in public debt & liabilities, which is devaluing local currency (INR) over the years; USDINR is appreciating almost 5% on average, in line with headline inflation.

Bottom line

Considering India’s potential inflation & growth trajectory along with the elevated unemployment rate, RBI may bring down the repo rate gradually to around 5.0% by Dec’25 and 4.0% terminal rate by Dec’26 against Fed’s 3.0% and PBOC/China 3.0%.

Market impact:

RBI rate cuts; i.e. lower borrowing costs would be better for the overall Indian economy and stocks, especially interest-sensitive real estate, automobile, banks & financials, consumer durables, retail, infra, and even export-oriented sectors like pharma and IT service (higher USDINR). But at the same time, India’s imported inflation may rise as USDINR may scale the 90-93 range by Dec’26, if RBI indeed cut repo rates to 4.0% COVID levels. India’s Bank Nifty surged to a fresh life time high on hopes of another 100 bps rate cuts and upbeat report card by HDFC, ICICI and Indusind Bank.

India’s Nifty gained almost 2000 points in the last few days in hopes of a less hawkish Trump trade war on India and an accelerated trade deal (BTA) between India and the US. Looking ahead, the market focus will be on Trump’s morning mood, comments, and Truths/Tweets rather than RBI or Fed. Trump tariff uncertainty may drag Wall Street and Also Dalal Street.

Weekly-Technical trading levels: India 50 Future, Bank Nifty Future and USDINR

Whatever may be the fundamental narrative, technically Nifty Future (CMP: 24354) now has to sustain over 24500-24600 for a further rally to 24950/25150-25200/25450* and 25650/26000-26200/26500 an; otherwise, sustaining below 24450 Nifty Future may again fall to 24000/23800-23600/23400-23150/22900 and 22200/22000-21700/21500 and further 21500/21200-20900/20450 and even 19800/19600-17650/16700 in the coming days.

Technically, Bank Nifty (55550) now has to sustain over 56000 for a further rally to 56500/57000-57500/58000 and 58500/58900-60500/61000 and further 61500-65750 in the coming days; otherwise, sustaining below 55900. BNF may again fall towards 55100/54600- 54000/53500 and 53000/52500-52000/51500 and further 51000/50500-50000/49700 and 49200-47700 in the coming days.

Technically, USDINR (85.45) now has to sustain over 85.00 for a rebound to 86.00/86.75-87.50/89.00 and 90.00-92.75; on the flip side, side, sustaining below 84.50, USDINR may further fall to 84.00/83.50-83.00/82.50 in the coming days.