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Minutes from the April rate review suggest that the door remains open for a third successive cut in June. To recall, the monetary policy committee (MPC) had voted unanimously in favour of a 25bp cut in April. The policy stance was revised to ‘accommodative’ from ‘neutral’, signaling the bias for the rates to either stay on pause or be lowered from current levels (India: Tariffs and RBI’s three imperatives). The RBI members, who are at the dovish end of the spectrum, highlighted that the moderation in inflation provided room to lower rates, with growth at less than aspirational levels. Headwinds from global trade disruptions pose additional downward risks. External members provided a more mixed view, with one expressing the openness to lower rates further in the months ahead, while another highlighted that April’s move was pre-emptive, preferring to be calibrated and incremental in its approach, going forward. Markets are currently pricing in the likelihood of at least two more rate cuts within the coming year.
On tariff developments, markets are coming around the view that India is better placed than peers, not only because of its relatively smaller exposure to US exports (as % of GDP) and smaller indicative tariff rate (as compared to few Asean countries), but also affirmative signals from the US administration that a bilateral agreement between the two countries was in the offing. Negotiations have been ongoing, fuelled also by optimism following US Vice President Vance’s visit to India this week. The IMF’s revised forecasts carried a small downward adjustment to India’s 2025 forecast to 6%, before expecting it to improve in 2026. This optimism is also reflected to the asset market price action, with the equity indices recouping all lost ground since the reciprocal tariff announcement as well as rupee holding on to gains. 10Y yield has been largely steady, despite foreigners trimming positions in April. Outflows this month, after a strong finish in March, likely reflected a regional trend as few other Asian markets also witnessed similar profit-taking trades, in midst of unfavourable external developments. Modest compression in rupee vs UST yield spreads this month might have also played a part. Outside of global uncertainties, the domestic environment is conducive for rupee bond markets given easing inflation, expectations of additional rate cuts, flush liquidity, steady bond purchases under the ongoing open market operations and favourable demand-supply mix for borrowings. Separately, while not market moving, the government has signaled a strong response to fatalities caused by a militant attack in a northern state in the country. 
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