The Reserve Bank of India (RBI) may cut the repo rate in 2025 after holding it at 6.50 percent for more than one and a half years amid easing inflation, economists said.
Additionally, economists also peg higher growth for the current year.
“We are pencilling in 50 basis points (bps) shallow rate cut cycle in 2025. We see growth chugging along at around 6.5 percent in FY26 from 6.4 percent in FY25 with inflation seen moderating to sub 4.5 percent in FY26 from 4.8 percent in FY25,” said Kanika Pasricha, Chief Economic Advisor at Union Bank of India.
The RBI has kept the repo rate unchanged for the straight 11th time in its December monetary policy after increasing 250 basis points (bps) from May 2022 to February 2023. Since April 2023, it has held the repo rate steady at 6.5 percent.
This was done to contain the higher inflation and bring it back to the medium-term target of 4 percent.
“After easing stance on liquidity & CRR by 50 bps, the RBI may review policy rates; we see 50 bps rate cuts in 1H25,” Jefferies said in a report.
Rate cut talk emerged after India’s Gross Domestic Product (GDP) growth numbers remained sluggish in the second quarter of the current financial year, and hopes rose after the new RBI Governor Sanjay Malhotra took charge.
Despite sluggish growth in the second quarter, the Indian government last month said it "is a temporary blip" and that an improvement will be seen in coming quarters.
The RBI’s Financial Stability Report also reiterated that the real GDP growth is expected to recover in the third and fourth quarters of the current financial year on the back of a pick-up in domestic drivers, mainly public consumption and investment, strong service exports and easy financial conditions.
Food inflation key
On the inflation front, economists said it will moderate and may reach closer to the target, but the trajectory of the food inflation is key to watch.
The RBI report also said that the rising frequency of extreme weather events (e.g., heat waves and unseasonal rains) continues to pose risks for food inflation dynamics. Persisting geopolitical conflicts and geo-economic fragmentation can also impose upside pressures on global supply chain and commodity prices.
However, former RBI Governor Shaktikanta Das in the December monetary policy had said that food inflation may start easing only from Q4:2024-25, backed by a seasonal correction in vegetable prices, kharif harvest arrivals, likely good rabi output and adequate cereal buffer stocks.
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