The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is currently convening from February 4 to 7, 2025, with the policy announcement scheduled for February 7 at 10:00 AM IST.
Anticipated Policy Decisions:
- Interest Rate Cut: A majority of economists anticipate a 25 basis points (bps) reduction in the repo rate, bringing it down from 6.5% to 6.25%. This would mark the first rate cut in nearly five years and the inaugural policy move under Governor Sanjay Malhotra.
Factors Influencing the Expected Rate Cut:
- Economic Growth Concerns: The RBI previously revised its GDP growth forecast for FY25 from 7.2% to 6.6%, indicating a slowdown that may warrant monetary easing to stimulate the economy.
- Inflation Trends: While inflation remains above the RBI’s 4% target, recent data suggests it may have peaked, providing room for a cautious rate reduction.
- Liquidity Management: In December 2024, the RBI reduced the Cash Reserve Ratio (CRR) by 50 bps, injecting approximately ₹1.2 trillion into the banking system. Given the current liquidity shortfall of around ₹1.96 trillion, another CRR cut is possible to further ease liquidity constraints.
Market Reactions Ahead of the Policy Announcement:
- Equity Markets: Indian benchmark indices have risen, driven by expectations of a rate cut to bolster economic growth. The Nifty 50 increased by 0.28%, and the BSE Sensex rose by 0.31% in recent trading sessions.
- Bond Markets: Foreign investors have significantly increased their purchases of Indian government bonds, with ₹182 billion acquired in the past week, anticipating a rate cut. This surge has led to a decline in the 10-year benchmark bond yield by 20 bps.
- Currency Markets: The Indian rupee has depreciated to a record low of 87.4650 against the U.S. dollar, influenced by expectations of a domestic rate cut and global trade uncertainties.
Potential Implications of the Rate Cut:
- Economic Stimulus: A rate cut is expected to lower borrowing costs, encouraging investment and consumption, thereby supporting economic growth.
- Inflation Dynamics: While a rate cut can stimulate demand, the RBI must monitor potential inflationary pressures to ensure they remain within the target range.
- Financial Market Stability: The RBI will aim to balance monetary easing with measures to maintain currency stability and manage capital flows effectively.
In conclusion, the upcoming RBI monetary policy decision is poised to address the dual objectives of fostering economic growth and maintaining price stability. The anticipated rate cut reflects the central bank’s response to evolving economic indicators and its commitment to supporting the Indian economy.
