The Reserve Bank of India (RBI) is poised for significant changes as its Monetary Policy Committee (MPC) meeting commenced on February 5 and is set to conclude on February 7, 2025. Market participants are eager to know if this meeting will mark the first cut to the repo rate since May 2020, amid growing concerns about slowing economic growth and moderative inflation.
New RBI Governor Sanjay Malhotra leads the six-member MPC, and the upcoming decisions are especially important because it follows the Union Budget presented on February 1, which aims to bolster economic consumption through income tax relief for the middle class. Economists widely anticipate a 25 basis point reduction from 6.50% to 6.25%, which could provide much-needed financial support as the economy grapples with sluggish growth rates and rising inflation pressures.
"An interest rate cut could be pivotal... particularly after a Budget aimed to boost consumption and investment," remarked Pradeep Aggarwal, Founder and Chairman of Signature Global (India). His assertion reflects the sentiment of many analysts as they perceive lowering rates as necessary for reviving growth potential and enhancing credit accessibility.
The backdrop of the current MPC meeting reveals conclusive economic data indicating India’s GDP growth has faltered, dropping to 5.4% for the July-September period—marking the lowest growth seen in seven quarters. A cumulative drop from earlier projections necessitates urgent action to stimulate activity.
Inflation has played its part too, with the rates reportedly easing to 5.22% as of December 2024. "Balancing macro and geopolitical factors, we believe there is space for a 25bps rate cut," noted Dipanwita Mazumdar, economist at Bank of Baroda. She highlights the continuing pressures from global economic conditions, including the potential volatility from geopolitical tensions, as factors complicate the RBI’s decision-making framework.
Despite the promise of easing rates, there remains caution within some sectors. There's mixed sentiment among financial analysts, with some predicting hesitation from the RBI. Analysts worry global factors—such as trade tensions and inconsistent fiscal dynamics—might thwart timely monetary easing. "With inflation still hovering above the target, the RBI may prefer to adopt a wait-and-see approach before any cuts are made," said Amar Ambani, Executive Director at Yes Securities.
This apprehension is tempered by figures from broader market movements. Foreign investments have recently surged, with ₹182 billion being purchased by international bond investors over one singular week, surpassing earlier weeks combined. Analysts suggest this could bode well for moving forward with rate cuts, framing Indian assets as attractive should the RBI lower borrowing costs.
Leading up to the MPC's decision, major Indian banks are already adjusting their fixed deposit rates, preparing for the potential ripple effects of the meeting's outcome. For example, Axis Bank and Punjab National Bank have revised their interest rates on fixed deposits, changes widely interpreted as indicators of larger lending shifts depending on the RBI's action.
“If the repo rate reduces to 6.25%, it will inevitably lead to lowered EMIs for various loans, stimulating demand across sectors reliant on credit,” added Mandar Pitale, Head Treasury at SBM Bank India, spotlighting likely impacts of the anticipated cut.
While some analysts remain hopeful, projecting comprehensive structural adjustments—including potential adjustments to the Cash Reserve Ratio (CRR)—others underline the constraints posed by silently lurking inflation risks. There’s consensus among investors about the necessity for supportive monetary policy, but how the RBI reconciles global trade risks with local economic needs will be pivotal.
The committee has remained firmly neutral since October 2023, allowing for flexibility if growth indicators worsen, and the meeting presents a ripe opportunity to shift from observation to action. Whether the MPC adjusts interest rates come February 7 is yet to be seen, but all eyes are on the central bank, hoping for decisions aimed at emboldening economic recovery amid uncertainty.