RBI monetary policy: Why Governor Sanjay Malhotra may not linger on a rate cut decision. EXPLAINED

RBI monetary policy: As Budget 2025 showcased the government's focused intent on fiscal consolidation and measures to boost consumption and economic growth, all eyes are on the Reserve Bank of India (RBI) to play its role in reviving the country's faltering economic growth.

Experts believe India's current growth-inflation dynamics have created an almost perfect situation that warrants a rate cut. So, the central bank may announce a token 25 bps rate cut on Friday, February 7.

India's growth-inflation dynamics

India's gross domestic product (GDP) figures have been declining in the recent quarters. Falling for the third consecutive quarter, India's Q2FY25 GDP growth rate came at 5.4 per cent, the lowest in nearly two years. The Q3 GDP prints will be released by the Ministry of Statistics and Programme Implementation (MoSPI) on February 28.

Growth has clearly slowed and needs attention, though it hasn’t yet reached alarming levels.

According to Economic Survey 2025, India's real GDP growth may come at 6.4 per cent in FY25 (as per first advance estimates), staying close to the decadal average despite global uncertainty.

On the other hand, India's retail inflation eased to a four-month low in December. Retail inflation, based on the Consumer Price Index (CPI), rose 5.22 per cent in December, down from 5.48 per cent in November and 5.69 per cent a year ago, MoSPI data showed.

Inflation is expected to come down gradually to around 4 per cent in FY26.

Why the RBI may not delay a rate cut

While there is a risk of global uncertainty due to Donald Trump's tariff policies, the RBI would want to act swiftly to increase liquidity in the system. A rate cut may be the most suitable option as oil prices remain stable and inflation risk has moderated.

"GDP growth has slowed down to 5.40 per cent, and any recovery may take two to three quarters. Inflation has been higher than expected due to food inflation, mainly on account of onion and tomato prices caused by short-term supply-demand mismatches. With oil prices remaining stable, the threat of inflation may be very moderate at this juncture," said Joseph Thomas, the head of research and economist at Emkay Wealth.

"A rate cut is inevitable along with liquidity enhancement measures. The US Fed has already cut rates three times, and the next rate cut in the US will be much earlier than expected," Thomas said.

Experts say US Fed's pause on the interest rate cuts may not deter the RBI from cutting rates as it will focus more on the domestic economic conditions.

"Fed's pause may not have an overbearing effect on the RBI policy stance. The overriding consideration for the RBI will be domestic economic conditions and, more particularly, fostering growth," Thomas said.

Dipti Deshpande, Principal Economist at Crisil, expects CPI inflation to come closer to 4 per cent target in January.

"Led by softer food prices, consumer prices inflation (CPI) is expected to decline in January, inching closer to the 4 per cent CPI inflation target of the MPC. The tighter fiscal stance and expectations of lower inflation should open the path for rate cuts," she said.

"We expect the MPC to bring down the repo rate by 25 basis points in its February meeting while also keeping liquidity conditions supportive," Deshpande said.

RBI rate cuts: Should we brace for a shallow rate cut cycle?

The rate-cut cycle may be shallow, as the central bank must account for evolving global and domestic factors. Domestically, the risk of uneven rainfall due to climate change persists, while globally, the "Trump factor" adds uncertainty. No one knows how his involvement in Middle Eastern affairs will unfold.

"Balancing and counterbalancing all macro and geopolitical factors, we believe there remains space for a 25 bps rate cut by RBI in the upcoming policy. The cumulative cut in the entire cycle could be nearly 50-75 bps," said Dipanwita Mazumdar, Bank of Baroda's economist.

Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, expects a cumulative rate cut of 50 bps this year, beginning with a 25 bps cut in this policy.

However, Bhardwaj added that the room for incremental aggressive rate cuts is closing, given the global uncertainties.

"The prolonged pause by the Fed amid lingering fiscal policy uncertainty from the US administration is likely to keep markets on tenterhooks, risking higher rates for longer," said Bhardwaj.

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