A poll of economists and treasury heads across banks and market experts, hint that a brand new Monetary Policy Committee that will meet from February 4 - 7, led by Sanjay Malhotra, the new governor, Reserve Bank of India may hand out a rate cut in the upcoming Monetary Policy of Reserve Bank of India. Being the first MPC under Malhotra, the expectation is that the repo rate cut or the benchmark lending rate fixed by the RBI could be reduced by 25 basis points (bps) from 6.5 percent to 6.25 percent in the upcoming MPC. The MPC will announce its decision on repo rate on February 7.
The rate cut, according to experts seems likely even as inflation remains above the medium term target of 4 percent. Sluggish growth and advance estimate of the government, paired with a slew of measures to infuse liquidity has made the base case in favour of a rate cut.
To be sure, last week the RBI announced steps to inject Rs 1.5 lakh crore of liquidity into the banking system. This is following Rs 1.16 lakh crore of liquidity introduced in December thanks to a 50 bps reduction in cash reserve ratio.
The RBI will also conduct a dollar-rupee buy/sell swap auction of $5 billion for a tenor of six months.
A rate cut at this juncture is expected to add a reasonable boost to India's consumption demand. Seen against the backdrop of an income tax relief given to tax payers earning Rs 12 lakhs or lower, a rate cut at this point, according to economists may go a long way in giving the sentimental thrust to consumption demand.
India’s growth is set to dip to 6.4 percent in FY25, its lowest level in four years, pulled down by a likely decline in manufacturing and investment growth, according to preliminary data released on January 7. Prior to this, the RBI in the December monetary policy cut its GDP growth forecast to 6.6 percent for the current fiscal year, from 7.2 percent earlier.
"We maintain expectation of February rate cut for India, with inflation beginning to show visible signs of moderation. Sharp reduction in food prices led by vegetables, is likely to bring CPI inflation to 4.5% in January," Gaura Sengupta, Chief Economist, IDFC First Bank.
Economists and market experts Moneycontrol spoke to suggest that India could see its benchmark rate falling by at 50 - 75 bps in 2025. Following a likely cut in the upcoming February MPC, there could be another 25 - 50 bps cut spread. However an economist of a leading foreign bank said it would still be too premature to talk about what could happen in April or July just yet. "It was expected that US will be aggressive on the rate action, but that doesn't seem to be the case anymore because of inflation pressures. India also needs to watch out for incoming data closely," he said.
To be sure, despite pressures from the Trump presidency, the US Fed decided to pause interest rate cuts last week, after bringing it down by 25 bps in December 2024.
Back home, the RBI has kept its policy repo rate unchanged for the 11th time till its December MPC meeting. This is after increasing it by 250 bps from May 2022 to February 2023. Since April 2023, the repo rate has been steady at 6.5 percent, in order to keep a check on the inflation rate and bring it to the medium-term target of 4 percent.
DBS Group Research report said that amidst decelerating inflation, a brief respite from a one-way dollar rally, signs of soft demand, and ongoing fiscal consolidation, the onus is on the monetary policy to assume a growth supportive tone.
While the repo rate has remained unchanged for almost two years, in October last year, the MPC changed its stance from 'Withdrawal of accommodation' to 'Neutral' indicating that the rate setting team is open to tinkering its approach to monetary management, but not a rate cut just yet.
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