RBI likely to cut repo rate by 25 basis points: Business Standard poll

With the Union Budget announcing measures to support consumption while maintaining fiscal discipline, the ball is now in the central bank’s court to stimulate sluggish economic growth.

The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) is expected to reduce the policy repo rate for the first time in almost five years, according to all respondents except Yes Bank in a Business Standard poll of 10 participants. The respondents anticipate a 25-basis-point (bp) rate cut.

The RBI will announce its policy review on February 7. The domestic rate-setting panel has kept the policy repo rate unchanged for the last 11 consecutive meetings after raising it by 250 bps between May 2022 and February 2023. The last rate cut was in May 2020, during the Covid-19 pandemic.

A rate cut is likely due to weak growth, expectations of declining inflation, and fiscal prudence demonstrated in the Budget. Gross domestic product (GDP) growth fell to a seven-quarter low of 5.4 per cent in the July-September period of 2024-25.

Additionally, recent liquidity measures announced by the RBI have further increased this possibility, according to respondents in the poll.

“We expect a 25-bp cut in February, as upside risks to inflation are easing. Consumer Price Index (CPI) inflation for 2025-26 is expected to average 4 per cent. The January CPI inflation print is likely to be below 4.5 per cent,” said Gaura Sen Gupta, chief economist at IDFC First Bank.

“Meanwhile, growth is showing signs of moderation, with weakness in urban consumption and capital expenditure. The Union Budget is a positive, as it has stayed on the fiscal consolidation path,” Sen Gupta added.

Inflation eased to a four-month low of 5.22 per cent in December, down from 5.48 per cent in the previous month, as food prices provided some relief. However, December marked the fourth consecutive month of inflation exceeding 5 per cent. Food inflation also moderated, falling to 8.4 per cent from 9 per cent in November, dipping below 9 per cent for the first time in four months.

Respondents were divided on whether the RBI will revise its growth and inflation forecasts for the current financial year (2024-25).

In December, the RBI revised its GDP growth forecast for the current financial year to 6.6 per cent, down from the earlier estimate of 7.2 per cent, while raising its inflation forecast to 4.8 per cent from 4.5 per cent.

The domestic rate-setting panel changed its policy stance to neutral in October from "withdrawal of accommodation." Respondents do not expect the panel to alter its stance in the February meeting, as the rate-cut cycle is expected to be shallow. Additionally, given global uncertainties, a neutral stance provides the MPC with greater flexibility.

“The rate-cut cycle is likely to be shallow, and given global uncertainties, a neutral stance offers the MPC more flexibility,” said Aditi Nayar, chief economist at ICRA.

A majority of respondents do not expect the RBI to announce additional liquidity measures. However, they foresee further clarification on measures already introduced.

“RBI has already announced liquidity measures and may wait some more time; hence, a cash reserve ratio (CRR) cut is unlikely in the next policy. The RBI assures the market about liquidity availability in the system,” said V R C Reddy, head of treasury at Karur Vysya Bank.

The RBI cut the CRR by 50 bps in its December policy. “I don't think CRR will be cut again, as they mentioned last time that the reduction was to restore it to its earlier level,” said Madan Sabnavis, chief economist at Bank of Baroda.

However, another segment believes the current durable liquidity measures are insufficient to ensure effective transmission.

“The current durable liquidity measures announced are not enough to ensure transmission,” said Sen Gupta.

After reviewing current liquidity and financial conditions, the RBI announced a series of measures to inject durable liquidity into the banking system. These include open market purchase auctions of Government of India securities totalling Rs 60,000 crore in three tranches of Rs 20,000 crore each on January 30, February 13, and February 20. Additionally, a 56-day variable rate repo auction for Rs 50,000 crore will be held on February 7, and a USD/INR buy/sell swap auction of $5 billion for a six-month tenor is scheduled for January 31.

Net liquidity in the banking system was in a deficit of Rs 2.2 trillion on Thursday, according to the latest RBI data.