RBI Policy
After Budget boost to growth, MPC seen cutting repo rate on Fri
This story was originally published at 14:19 IST on 3 February 2025
Register to read our real-time news.Informist, Monday, Feb. 3, 2025
By Shubham Rana
NEW DELHI - The Reserve Bank of India is expected to follow the 2025-26 (Apr-Mar) Union Budget in stepping up efforts to revive the economy, with the Monetary Policy Committee expected to lower interest rates for the first time in nearly five years later this week, according to an Informist poll.
Twelve of 14 economists and treasury heads polled said they expect the MPC to lower the repo rate by 25 basis points to 6.25% at the end of its three-day meeting that begins on Wednesday. RBI Governor Sanjay Malhotra will announce the committee's decision on Friday.
"Although growth was tracking a tad weaker than we expected in Oct-Dec, the trend in inflation is in line with our view alongside the Budget, which continued on a fiscal consolidation path," Morgan Stanley economists said in a report Monday. "As such, domestic growth and inflation dynamics warrant easing and will likely outweigh the concern of volatility stemming from external factors in the policy on Feb. 7."
The MPC, which last cut the policy repo rate in May 2020 at the height of the COVID-19 pandemic, has left the key interest rate unchanged at 6.50% for two years to fight high inflation. However, with growth sliding to a seven-quarter low of 5.4% in Jul-Sept and the statistics ministry's first advance estimate pegging the full-year number at a four-year low of 6.4%, growth concerns have shot up. This was reflected in the government's decision to announce major changes to personal income tax rates on Saturday in the Budget at a revenue loss of INR 1 trillion.
The Economic Survey for FY25 has projected GDP growth at 6.3-6.8% for FY26, much lower than 8.2% in FY24.
On the price side, while CPI inflation remains well above the medium-term target of 4.00%, it was down nearly 100 bps to 5.22% in December compared to its October level. Going forward, prices are seen rising at a slower clip, thanks to improved supply of key food items such as vegetables, with the RBI forecasting in December that headline retail inflation may fall to 4.0% in Jul-Sept.
Two members of the MPC--external members Ram Singh and Nagesh Kumar--voted in favour of lowering the repo rate in December. This week's meeting will be the first for new Governor Sanjay Malhotra and Deputy Governor Rajeshwar Rao. The latter has been given temporary charge of the RBI's Monetary Policy Department following the retirement of Michael Patra in mid-January.
To be sure, a rate cut on Friday is not a given. According to ICICI Securities Primary Dealership--which expects a 25 bps reduction this week--the positive fiscal impulse from the Budget means the RBI "should be under less pressure to believe there is disproportionate burden on monetary policy to revive growth." Moreover, inflation being above 5% could lead to the MPC holding off from easing until April, while global uncertainty from the tariff hikes announced by US President Donald Trump have complicated the MPC's decision as the rupee hurtled past the 87-per-dollar mark on Monday.
"Recent pick-up in the pace of rupee weakness, likely disruption to global trade, signs of a warmer spring, and a consumption boost from central and state government budgets could provide a sense of caution," economists at QuantEco Research said, predicting a rate cut only in April.
With inflation seen moving towards 4% in FY26, economists are of the view the MPC may lower the repo rate by up to 100 bps in the coming 12-15 months, although the consensus seems to be that the easing will be closer to 50-75 bps.
Besides a rate cut, Friday may also see the RBI adding to its liquidity supportive measures of recent weeks that should inject around INR 1.5 trillion into the banking system by the third week of February through open market purchases of gilts, dollar/rupee buy/sell swaps, and long-term variable rate repos. The central bank has also been buying bonds in the secondary market, with the week ended Jan. 24 seeing purchases of INR 208.50 billion.
"The RBI needs to uphold MPC's 'neutral' policy stance and prevent incremental tightness of money market rates on account of reserve drawdown to curb rupee volatility. As such, we continue to expect the RBI to conduct at least INR 3 trillion OMO purchases by March 2026 to inject durable liquidity," QuantEco Research said.
The following are expectations of respondents from this week's meeting of the Monetary Policy Committee:
| ORGANISATION | REPO RATE EXPECTATION |
| DBS Bank India | 25 bps cut |
| Elara Securities | 25 bps cut |
| HDFC Bank | 25 bps cut |
| HSBC | 25 bps cut |
| ICICI Securities Primary Dealership | 25 bps cut |
| IDFC FIRST Bank | 25 bps cut |
| Kotak Institutional Equities | Rate cut |
| Moody's Analytics | Status quo |
| Morgan Stanley | Rate cut |
| Nirmal Bang Insitutional Equities | Rate cut |
| Nomura | 25 bps cut |
| QuantEco Research | Status quo |
| Union Bank of India | 25 bps cut |
| YES Bank | Rate cut |
End
Edited by Vandana Hingorani
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