RBI Likely to Cut Repo Rate by 25 Basis Points: Business Standard Poll February 3, 2025 by

RBI Likely to Cut Repo Rate by 25 Basis Points: Business Standard Poll

The Reserve Bank of India (RBI) is expected to lower its benchmark repo rate by 25 basis points (bps) in its upcoming Monetary Policy Committee (MPC) meeting, according to a recent Business Standard poll. This move, if implemented, would bring the repo rate down from 6.50% to 6.25%, marking the first rate cut in nearly a year.

Expectations from the Upcoming Policy Meeting

The poll, conducted among leading economists, analysts, and banking professionals, revealed a strong consensus that the RBI is preparing to ease its monetary policy stance amid signs of moderating inflation and slowing economic growth. A majority of respondents cited the need for a rate cut to support economic momentum, particularly as global economic uncertainties persist.

While some analysts expect a cautious approach from the central bank, many believe that a 25 bps cut is likely to signal the beginning of a more accommodative stance going forward. Market participants are closely monitoring the RBI’s commentary on inflation, liquidity, and global financial conditions.

Key Factors Influencing the Rate Cut Decision

1. Easing Inflationary Pressures

India’s retail inflation has shown signs of moderation over the past few months. According to the latest Consumer Price Index (CPI) data, inflation dipped to 5.48% in November 2024, down from 5.7% in the previous month. A sustained decline in food prices and a stable fuel cost environment have contributed to this downward trend. The RBI has consistently emphasized its commitment to keeping inflation within its target range of 4% (+/- 2%), and the recent data suggests that inflationary risks are receding.

2. Slowing Economic Growth

The Indian economy expanded at a slower pace in the last quarter, with GDP growth slipping to 5.4%—its weakest performance in over a year. The slowdown is attributed to weakened industrial output, a dip in private consumption, and sluggish export performance due to global demand uncertainties. A rate cut could provide much-needed relief to businesses and households by lowering borrowing costs and stimulating investment.

3. Global Economic Conditions

With major central banks, including the US Federal Reserve and the European Central Bank, signaling a potential shift toward rate cuts in 2025, the RBI may align its monetary policy accordingly. Lower global interest rates tend to reduce capital outflows from emerging markets like India, providing additional room for the RBI to consider easing policy without triggering excessive currency depreciation.

4. Liquidity and Banking Sector Considerations

The RBI has recently taken steps to infuse liquidity into the banking system through open market operations (OMOs) and bond purchases. A repo rate cut would further enhance liquidity, reducing the cost of funds for banks and enabling them to lend more freely to businesses and consumers. This move could be crucial for sectors like real estate, automobiles, and infrastructure, which are highly sensitive to interest rate changes.

Divergent Views Among Policymakers

Despite the strong case for a rate cut, there are differing opinions within the MPC. Some members remain cautious, arguing that the RBI should wait for clearer signs of sustained disinflation before lowering rates. They point out that core inflation (excluding food and fuel) remains relatively sticky and that premature rate cuts could risk rekindling price pressures.

Additionally, concerns over the rupee’s depreciation against the US dollar could influence the RBI’s decision. A lower interest rate differential between India and the US could prompt capital outflows, putting downward pressure on the rupee. However, with the Fed expected to adopt a dovish stance in 2025, this risk may be mitigated.

Market Reactions and Investor Sentiment

The Indian bond market has already priced in expectations of a rate cut, with yields on government securities declining in anticipation of an accommodative policy shift. Equity markets, too, have responded positively, with banking and interest rate-sensitive sectors witnessing gains ahead of the policy announcement.

Foreign institutional investors (FIIs) have maintained a cautious stance, awaiting more clarity on the RBI’s policy trajectory. However, a rate cut coupled with a stable macroeconomic outlook could attract renewed foreign capital inflows into Indian equities and bonds.

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