RBI starts deliberations on interest rate amid expectations of 25-bps cut

FPJ News Service mumbai

Days after the Union Budget, the Reserve Bank of India (RBI) on Wednesday started deliberations on the monetary policy amid expectations of a 25 basis-points rate cut, which will be the first in five years, as inflation remains within central bank's comfort zone, though the sliding rupee continues to be a concern. The RBI had last reduced the repo rate by 40 basis points to 4% in May 2020 to help the economy tide over the crisis following the outbreak of the Covid-19 pandemic and subsequent lockdown. 

But in May 2022 the central bank started a rate hike cycle in view of the Russia-Ukraine war and paused it only in May 2023. Reserve Bank Governor Sanjay Malhotra chaired his first Monetary Policy Committee (MPC) meeting here. The decision of the six-member panel will be announced on Friday. Experts opined that the situation is now conducive for a rate cut as it will complement the initiatives announced in the Union Budget to push a consumption-led demand growth.

An SBI research report said the CPI based retail inflation is expected to come down to 4.5% in the fourth quarter and average 4.8% in the current financial year. It also said the January inflation numbers are trending closer to 4.5%. Given the fiscal stimulus and the uncertain impact of trade wars, RBI faces the delicate task of balancing the risks. As the fiscal stimulus plays out, the central bank at least in the short run has room for rate cuts, it said.

“We expect a 25-basis point rate cut in February 2025 policy. Cumulative rate cut over the cycle could be at least 75 bps, with 2 successive rate cuts over February and April 2025. With an intervening gap in June 2025, the second round of rate cuts could start from October 2025,” said the research report from the Economic Department of SBI.

Pradeep Aggarwal, founder and chairman, Signature Global (India) opined that a potential repo rate cut by the RBI in its upcoming MPC meeting could be a pivotal move in shaping India's economic momentum, particularly as the Union Budget 2025 is expected to drive consumption and investment.