BofA expects RBI to cut repo rate by 25 bps in February MPC meeting

Bank of America (BofA) Global Research has projected a shift in the Reserve Bank of India's (RBI) monetary policy stance, citing stabilising market sentiment and improving domestic macroeconomic conditions. According to BofA, the delayed imposition of US tariffs has allowed the RBI to focus on local growth and inflation data, paving the way for 25 basis points (bps) cut in the repo rate to 6.25 per cent in the February Monetary Policy Committee (MPC) meeting.

BofA emphasised that the stabilisation of market sentiment, coupled with easing inflationary pressures, supports the need to lower monetary policy rates. The firm highlighted that both growth and inflation indicators suggest the necessity of monetary easing. 

BofA expects the rate cut to come with a potentially unanimous decision from the MPC. In addition, they anticipate steps to inject durable liquidity into the economy, including a possible 50 bps reduction in the Cash Reserve Ratio (CRR) or substantial bond purchases through open market operations (OMOs). These measures, BofA noted, would help prevent spikes in short-end rates, particularly as the RBI continues intervening in the foreign exchange market.

“We expect the RBI to prioritize growth as supply shocks fade. We maintain our view that the RBI could cut rates by 100bp in the cycle, given a durable alignment of headline CPI close to 4 percent through 2025. This will bring the repo rate to 5.50 percent by end-2025, which we identify as being close to the neutral rate,” it said in a recent note.

Shifting Policy Priorities Under New Leadership

BofA pointed out that the RBI's new leadership has shown a clear preference for supporting domestic growth. The firm observed that while the central bank has maintained a conservative approach regarding policy bias, it has been proactive in providing liquidity and stabilising short-term rates. 

BofA also noted a strategic shift in rupee management, with the central bank allowing necessary adjustments while anchoring growth and liquidity. According to BofA, this approach signals a broader transformation in the RBI’s policy playbook under the new governor.

Balancing Macro Challenges Amid Policy Shifts

Despite the optimistic outlook, BofA cautioned that macroeconomic challenges persist. Weak demand conditions and a rapidly declining inflation trajectory, driven by improved supply chains and lower food prices, continue to pressure the economy. BofA noted that concerns about the impact of a weaker rupee on imported inflation are mitigated by muted demand, ensuring limited passthrough effects in the near term.

The firm also highlighted the importance of the upcoming Union Budget FY2026 in shaping the monetary policy direction. If the budget balances fiscal prudence with growth objectives, it could further bolster the RBI’s case for rate cuts. BofA expects the RBI to revise its Q4 FY25 inflation projections downward, reflecting the sharp drop in vegetable prices, while maintaining its medium-term inflation outlook at 4.5 per cent for FY2026.

Outlook: Gradual Rate Cuts Through 2025

BofA maintained its view that the RBI would prioritize growth as supply shocks fade, potentially cutting rates by 100 bps during the monetary easing cycle. This would bring the repo rate down to 5.50 per cent by the end of 2025, which BofA considers close to the neutral rate. Such measures, the firm concluded, would align with the RBI’s goal of maintaining inflation near 4 per cent while fostering a supportive environment for economic recovery.

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