The Reserve Bank of India in its monetary policy committee (MPC) meeting in October changed its stance to "neutral" and then in the December MPC meeting, the cash reserve ratio (CRR) was cut by 50 basis points. But, throughout 2024, the repo rate, the benchmark rate at which the RBI lends money to commercial banks, has been left unchanged at 6.50 per cent.
The MPC meets once again this week between February 5 and February 7 and borrowers will be wondering if the RBI will give them something to cheer at last with a rate cut. There are many factors at play. India's GDP growth has sharply slowed. At the same time, high CPI (consumer price index) inflation, which had prevented the RBI from cutting interest rates, is expected to ease.
Separately, with the return of Donald Trump as US President, global trade tensions have risen. Against that backdrop, foreign institutional investors have continued to massively sell in the equity market, in turn pressuring the rupee, which breached the 87 to US dollar mark on Monday, before recovering on Tuesday.
The Union budget announced on February 1 will also be something the MPC will discuss. Finance Minister Nirmala Sitharaman announced the much-needed income tax relief for the vast middle class in a bid to boost consumption. At the same time, it continued its fiscal consolidation path, while capital expenditure spending were also largely steady.
Importantly, this will be the first MPC meeting under new RBI Governor Sanjay Malhotra. Earlier the revenue secretary, Malhotra was appointed the governor effective December 9, following the end of the tenure of Shaktikanta Das.
Malhotra has taken charge at a time of slowing growth. India's economy is expected to grow 6.4 per cent in the current financial year ending March 2025, which is significantly slower than last year's 8.2 per cent. That perhaps may warrant an interest rate cut. But, the central bank must also look at the inflation data. Thus far, high food prices have left little room for the RBI to cut rates. In December 2024, CPI inflation eased to a 4-month low of 5.22 per cent and the expectation is it will fall further towards 4.5 per cent as food prices ease. But, what impact trade wars have on inflation is uncertain for now.
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In recent times, the credit growth has slowed and the RBI recently announced several measures to boost liquidity in the banking system.
"The budget's focus on boosting consumption through tax cuts and job creation should have positive implications for demand and economic growth. In its February meeting, we expect the RBI to complement these measures with a 25 basis points policy rate cut and additional steps to support liquidity," felt Pramod Chowdhary, chief economist at DMI Finance.
Murthy Nagarajan, head of fixed income at Tata Asset Management expects the MPC to announce the change of its stance to "accommodative" from "neutral". It is also expected to cut rates by 25 bps and announce further liquidity-enhancing measures, he said.
Soumya Kanti Ghosh, member of the 16th Finance Commission and group chief economic advisor at State Bank of India is also expecting a 25 bps repo rate cut this time around.
"Given the fiscal stimulus and the uncertain impact of trade wars, the RBI faces a delicate task of balancing the risks. As the fiscal stimulus plays out, the RBI at least in the short run has room for rate cuts," he said.
The US Federal Reserve cut interest rates three times towards the end of 2024, but hit the pause in January 2025, amid uncertainty around Trump's economic policies. This pause by the Fed gives RBI some time to ascertain the inflationary expectations have been "fully anchored", felt Ghosh.
Ghosh expects the RBI to cut rates by at least 75 bps, with two successive cuts in February and April. After a break in June and then cut rates again from October 2025, he added.
Upasana Chachra, the chief India economist at Morgan Stanley, also expects monetary policy to provide support to growth. Domestic growth and inflation dynamics warrant easing and will likely outweigh the concern of volatility stemming from external factors in the policy on February 7, she said.
"We expect the RBI to build on the measures announced previously to improve liquidity through a rate cut in the next policy preview," said Chachra.
Puneet Pal, the head of fixed income at PGIM India Mutual Fund, however, believes there is only a 50 per cent probability of a rate cut this time.
"RBI may not be aggressive in cutting rates, so the total rate cuts in this cycle may be limited to 50 bps. It may not make too much of a difference if they start reducing rates in February or the April meeting. The Union budget has already provided stimulus in the form of lower personal income tax rates and these tax breaks can support consumption," he said.
Pal believes the focus of RBI will continue to be on addressing the liquidity deficit of the banking system along with rupee, though it seems that the new regime at RBI is "more willing to let rupee depreciate in light of the global scenario."