RBI may keep call rates and treps below the repo

Synopsis

The Reserve Bank of India aims to keep overnight borrowing costs below its main lending rate. This strategy supports economic growth despite rising imported inflation. Policymakers may overlook current high inflation figures. They are expected to maintain interest rates unchanged. This approach counters a slowdown and avoids hindering growth. Support from monetary and fiscal policies is expected to continue.

Mumbai: The Reserve Bank of India (RBI) will seek to keep overnight rates - call and treps - below the policy repo rate to boost growth amid an increased threat of imported inflation, economists said. That means policymakers may look past immediate inflation prints, which are likely to be elevated, while keeping rates unchanged, they said.

"Monetary policy has to lean against this growth negative situation that we are in and they (RBI) have to be countercyclical. If monetary policy is tightened in response to a supply shock, it will only add to downside risk to growth," said Gaura Sengupta, chief economist at IDFC First Bank.

Call rate averaged 5% in February, while its daily average is 5.29% in March so far, as liquidity is tight due to quarterly advance tax outflows and sustained currency-market interventions by RBI in the foreign exchange market.

The policy rate, after multiple reductions in the current easing cycle, stands at 5.25%.

Traders look at overnight rates for the first signal in the monetary policy trajectory.

And market expectations that these rates are going to be lower indicate a lower probability in immediate hikes in policy rates.

"RBI has infused significant durable liquidity via bond purchases. The government has cut GST rates to support consumption. The impact of supportive monetary and fiscal policy has been growth positive. Why undo all the effort due to an external shock?" Sengupta asked.

India’s consumer inflation gauge climbed to 3.21% in February. Although the gauge remains below the central bank’s mandated stability tramlines of 4%, higher oil prices are expected to add to pricing pressures and cause an ungainly spike in the benchmark.

REDUCED GROWTH FORECASTS
Goldman Sachs in its March 24 note lowered its forecast for India’s GDP growth. Its 2026 CY forecast, which was 7% before the US-Iran war, was revised down to 5.9%. The RBI’s February forecasts for growth for FY 26 stand at 7.4%, while policymakers expected Q1FY27 GDP at 6.9% and Q2FY27 GDP at 7%.

“Such war-like conditions where oil prices are high put stagflationary pressures on the economy. There is disruption toward growth and there is an inflation shock on the horizon if oil prices remain high for longer,” said Dhiraj Nim, economist and FX strategist at ANZ Bank.

“So, I think RBI will keep rates easy, but not too low. They may refrain from sending a very dovish signal and keep the call rate around the repo rate.” The RBI has purchased `7.6 lakh crore of bonds through open market operations (OMO), while the government earlier this year revised down GST slab rates to support consumption and bolster growth. The first policy review in the new financial year is scheduled April 6-8 in Mumbai.

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