The Reserve Bank of India (RBI) is poised to announce a significant cut to its benchmark interest rates during its upcoming Monetary Policy Committee (MPC) meeting, marking the first such reduction since May 2020. Under new RBI Governor Sanjay Malhotra, who assumed office in December 2024, the committee is expected to lower the repo rate by 25 basis points to 6.25% during its deliberation scheduled for February 5-7, 2025.
The anticipated rate cut is being driven by several economic factors, including India’s GDP growth rate, which has markedly slowed to 5.4% for the third consecutive quarter, reflecting the lowest growth figures experienced over the past two years. Economists widely view this economic downturn as necessitating intervention from the central bank. According to recent analyses, the RBI’s maneuver follows the government's approval of substantial fiscal measures aimed at boosting economic growth, including tax cuts announced during the federal budget.
“We continue to expect the RBI MPC to announce a 25 bps policy repo rate cut,” noted Shreya Sodhani, Regional Economist at Barclays, reinforcing expectations of policy easing amid decreasing inflation pressures. This sentiment is echoed by Shilan Shah, deputy chief economist at Capital Economics, who stated, “With the finance ministry still keeping the overall fiscal deficit in check, there is scope for the RBI to do more to boost the economy.”
A backdrop of waning inflation may provide the RBI with the necessary leeway to implement this rate cut. The Consumer Price Index (CPI) inflation stood at 5.22% for December 2024, down from previous months, reflecting mild deflationary pressures, which are likely to aid the RBI's agenda to revitalize economic activity without compromising its inflation goals. Dipti Deshpande, Principal Economist at Crisil, commented, “CPI inflation is expected to decline... inching closer to the 4 percent CPI inflation target of the MPC.” This assessment supports the view among economists advocating for monetary easing.
The upcoming MPC meeting also involves several new faces; the committee now includes three external members who joined recently, alongside the existing deputy governor. This fresh leadership dynamic under Malhotra raises questions about whether his approach will diverge from his predecessor, Shaktikanta Das, who maintained steady rates over the last two years, focused on hitting the 4% inflation target without yielding to pressures for growth.
The potential for the RBI's policy change is underscored by the broader economic climate, which includes external challenges such as proposed trade tariffs from the new U.S. administration, which could exacerbate the effects of capital outflows and currency depreciation. The rupee has fallen significantly against the dollar, recently hitting record lows, creating additional pressure on local inflation and complicates the RBI's decision-making process.
The forthcoming rate cut could align with the government's broader objective to stimulate consumption and improve growth projections, aiming to keep GDP estimates around 6.4% for FY25. These projections have decreased from prior estimates of 8.2% amid rising global economic uncertainties. Analysts are watching closely to see if the RBI will adopt an accommodating stance, possibly revising its previous focus on neutrality to forge pathways conducive to growth.
Market participants are reacting to anticipated monetary easing, as indicated by the recent rally in bonds and the declining yields observed. The 10-year benchmark yield has dropped as investor speculation increases around potential policy changes. Reports suggest traders are already pricing within expectations for the rate cut, with discussions of possible future rate actions gaining traction.
Looking forward, analysts expect the decision will spark discussion about the viability of extended accommodative measures to sustain economic recovery. Some predict the Indian central bank may introduce additional steps to boost liquidity, considering the existing liquidity deficit present within the banking system, currently hovering around Rs 2.5 trillion.
On February 7, after the culmination of the MPC meeting, Governor Malhotra's announcement will undoubtedly be closely watched for indications of the bank’s future monetary policy direction and the potential effects of its decisions on both domestic and global markets. The upcoming announcement holds significance not only to economic players within India but also to international investors who closely monitor RBI actions amid shifting geopolitical landscapes. All eyes are set on the decisions made during this pivotal meeting as the RBI aims to navigate the complex interplay of national interest rates, inflation, and the overarching push for economic growth.