Will RBI Cut Rates? 4 Things You Need to Know

Aakhir Tak – In Shorts

The RBI’s Monetary Policy Committee will announce its decision on Friday. Expectations are high for the first rate cut in 5 years. The last rate cut occurred in May 2020. Analysts have mixed opinions on the likelihood of a cut. A rate cut could boost consumption.

Aakhir Tak – In Depth

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is set to announce its policy decision on Friday, under the leadership of newly appointed Governor Sanjay Malhotra. All eyes are on the RBI and its decision regarding the interest rate cut.

There are expectations that the central bank’s MPC will decide on cutting the key rates for the first time in 5 years by 25 basis points (BPS). The potential impact on the economy is significant.

The last time the MPC announced a rate cut was way back in May 2020. The economic landscape has changed significantly since then.

While analysts have mixed views on whether the RBI will cut the repo rate, a positive announcement could provide another boost to consumption after the recent tax cuts in the Union Budget 2025. A cut could stimulate economic activity and consumer spending.

So, will the RBI‘s MPC cut rates tomorrow or stay focused on keeping inflation under control? Here are 4 things you need to know:

A 25 basis points (bps) rate cut is widely anticipated, marking the first reduction since the Covid-19 pandemic in May 2020.

The repo rate has remained steady at 6.5% since February 2023, following a cumulative 250 bps hike between May 2022 and February 2023. The RBI has maintained a consistent stance in recent months.

Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, believes that a cut is likely despite concerns over the depreciating rupee. He thinks the market is moving into consolidation.

“The market is moving into a consolidation phase on expectations of a pickup in growth in the coming quarters. In the near term, the market is likely to get a mild boost from a possible 25 bps rate cut by the MPC tomorrow. Even though steadily depreciating INR doesn’t provide a favourable macro backdrop for a rate cut, the MPC is likely to go for a 25 bps cut tomorrow to keep the optimistic momentum provided by the Budget going,” he said.

Madan Sabnavis, Chief Economist at Bank of Baroda, also supports the likelihood of a rate cut. “The budget has provided growth stimulus, and inflation is expected to ease. However, the rupee remains under pressure due to global trade uncertainties,” he noted. The RBI faces a complex balancing act.

On the other hand, Rumki Majumdar, economist at Deloitte, expects the RBI to maintain a cautious approach. “Balancing inflation and credit growth is tricky. While there is pressure to cut rates, the RBI may choose to keep rates unchanged but maintain an easy policy stance,” she said.

Umeshkumar Mehta, CIO at SAMCO Mutual Fund, highlighted global factors influencing the RBI‘s decision. “Bond yields in the US are rising due to inflation concerns, putting pressure on the Indian rupee. To avoid further depreciation, the RBI may choose to keep rates unchanged,” he said. International economic conditions play a significant role.

The government’s fiscal approach in the Union Budget 2025 has provided room for a potential rate cut to stimulate growth. India’s GDP growth slowed to a seven-quarter low of 5.4% in Q2 FY25, adding pressure on the central bank to support economic expansion. The government hopes the RBI will help boost the economy.

According to Bajaj Broking Research, the MPC is expected to maintain its neutral stance, allowing flexibility in future policy decisions. The brokerage also noted that RBI‘s recent liquidity measures aim to stabilize the financial system, reinforcing expectations of monetary easing. A neutral stance allows for flexibility in future decisions.

Edelweiss Mutual Fund predicts a total rate cut of 50 bps in the first half of 2025, emphasizing the need for monetary policy to complement fiscal measures in boosting demand. Monetary policy must complement fiscal measures to boost the economy.

Inflation remains a key factor in the RBI‘s decision-making. Consumer Price Index (CPI) inflation for FY26 is projected at 4%, with January inflation expected to be below 4.5%.

December inflation stood at 5.22%, marking four consecutive months above 5%, while food inflation eased to 8.4% from 9% in November. Inflation is a key factor in the decision.

Despite easing inflation, concerns over currency stability persist.

The rupee has been under pressure due to rising US bond yields and global trade tensions.

A rate cut could further weaken the currency, prompting the RBI to adopt a wait-and-watch approach. Currency stability is a major consideration.

The stock and bond markets are expected to react sharply to the RBI‘s decision. A rate cut could benefit banking stocks and lower borrowing costs for businesses and individuals, boosting consumption.

However, if rates remain unchanged, volatility may rise as investors recalibrate their expectations.

Prashanth Tapse, Senior VP (Research) at Mehta Equities Ltd, highlighted the dual factors influencing market sentiment. “All eyes are on Friday’s RBI MPC decision, with hopes for a rate cut to boost consumption,” he said.

Aakhir Tak – Key Takeaways to Remember

Will RBI Cut Rates First Time in 5 Years? MPC decision coming soon. Cut expected to boost consumption. Depends on global factors.

Aakhir Tak Editor-in-Chief

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