The Reserve Bank of India (RBI) is expected to lower its key policy repo rate by 25 basis points, marking its first rate cut in nearly five years. This decision comes as part of the RBI’s effort to revive India’s sluggish economic growth, which has shown signs of weakness in recent quarters.
The Anticipated Rate Cut and Its Context
As the economy struggles with slow growth and low inflation, the RBI’s Monetary Policy Committee (MPC) is under increasing pressure to take action. The committee has kept the repo rate unchanged for the last 11 consecutive meetings after hiking it by 250 basis points between May 2022 and February 2023.
The last time the RBI reduced its key interest rate was in May 2020, in response to the economic fallout from the COVID-19 pandemic. This upcoming decision, set to be revealed on February 7, 2025, is being closely watched by economists and market participants alike, as it marks a significant shift in the RBI’s approach.
- A 25-basis-point rate cut is expected to offer some relief to consumers and businesses alike, as borrowing costs decrease and liquidity improves.
- The poll, conducted by Business Standard, includes a wide range of financial institutions, all predicting the rate cut, except for Yes Bank.
Experts, such as Aditi Nayar, Chief Economist at ICRA, have stated that the likely rate-cut cycle will be “shallow” given the global uncertainties. Nayar also mentioned that a neutral stance would provide the MPC with more flexibility, especially in an uncertain global environment.
Weak Growth and Declining Inflation: The Key Drivers
India’s GDP growth has recently dropped to a seven-quarter low of 5.4% in the July-September period of 2024-25, highlighting the need for stronger economic stimulus. This slowdown, along with declining inflation, has prompted many economists to advocate for a policy shift.
As global uncertainties continue to impact trade and investment flows, the RBI’s rate-cutting decision is seen as a necessary step to stimulate domestic demand. The government, in its recent Union Budget, has already outlined measures to support consumption while maintaining fiscal discipline. The ball now lies in the RBI’s court to help bolster the economy further.
The anticipated rate cut also comes at a time when the RBI has been implementing liquidity measures to ease credit flow in the system. These actions reflect the central bank’s acknowledgment of the financial pressures faced by businesses and households in the current environment.
- The economic slowdown has intensified calls for more aggressive policy support.
- While inflation remains under control, some sectors are facing a squeeze due to high borrowing costs.
While some experts predict that the RBI may take a cautious approach, opting for a gradual reduction in the repo rate, others argue that the central bank must act decisively to prevent further economic stagnation.
The Impact on Markets and Borrowers
A reduction in the repo rate is likely to influence interest rates across the economy, including those on loans and deposits. For borrowers, this could mean lower monthly repayments on loans such as home loans, personal loans, and car loans, potentially easing financial pressure.
For businesses, a rate cut would likely lead to cheaper credit, which could stimulate investment and expansion, especially in sectors that have been struggling due to high financing costs.
For investors, the outlook remains mixed. On one hand, a rate cut could lead to increased market liquidity, driving stock prices up in the short term. On the other hand, the broader economic conditions could still weigh heavily on investor sentiment.
In particular, the central bank’s decision will impact the fixed-income market, where bond prices are expected to rise as yields fall with the rate cut.
