Will the Monetary Policy Committee (MPC) complement the FY26 Budget’s consumption-led growth push with a rate cut? A majority of the economists say if one considers the recent liquidity injection measures by the RBI, it has already prepared the ground for the MPC to go in for a shallow rate cut at its upcoming meeting on February 7 .
The repo rate was revised almost two years ago, when it was raised by 25 basis points from 6.25 per cent to 6.50 per cent. The MPC has held this rate static ever since, in a bid to align it with the 4 per cent retail inflation target. With retail inflation easing to a four-month low of 5.22 per cent in December 2024 from 5.5 per cent in November 2024 and second quarter GDP growth sliding to a seven-quarter low of 5.4 per cent from 6.7 per cent in the first quarter, there are expectations that MPC will prioritise growth, which calls for a rate cut.
Depreciating rupee
However, a depreciating rupee could delay a rate cut as that will stoke inflation through the imports route. India predominantly depends on crude oil imports for its energy requirements.
In the last bi-monthly monetary policy statement (December 6, 2024), the then RBI Governor Shaktikanta Das noted, “Going forward, as food price shocks wane, headline inflation is likely to ease and realign with the target as per our projections. “At present, it is necessary to draw on the flexibility provided by the neutral stance to wait for and monitor the incoming data for confirmation of the decline in inflation.”
Liquidity measures
The RBI may have created the conditions for a rate cut over the last few months through a two-stage cut of 25 basis points each in the cash reserve ratio in December 2024 and more recently through a host of liquidity infusion measures.
Last month (January 27), the RBI announced liquidity injection measures such as OMO (open market operation) purchase auctions of the Government of India securities for an aggregate amount of ₹60,000 crore; a 56-day Variable Rate Repo auction for a notified amount of ₹50,000 crore; and a USD/INR Buy/Sell Swap auction of $5 billion for a tenor of six months.
“The task of lifting growth (after the Budget announcements) is likely to pass on to the RBI. With inflation falling, room for rate cuts and easier liquidity has opened up. We expect a 25-bp rate cut in the February 7 meeting, followed by another one in April, taking the repo rate to 6 per cent,” Pranjul Bhandari, Chief Economist (India and Indonesia), and Aayushi Chaudhary, Economist (India, Indonesia & Sri Lanka), HSBC, said in a report.
Radhika Rao, Senior Economist – Eurozone, India, Indonesia, DBS Bank, said, “Providing liquidity is important, as is easing the price of that liquidity. Amidst decelerating inflation, a brief respite from a one-way dollar rally, signs of soft domestic demand and ongoing fiscal consolidation, onus is on the monetary policy to assume a growth supportive tone. We expect a 25-bp cut, marking a start to a shallow rate cut cycle,” she said.
Kaushik Das, Chief Economist - India, Malaysia and South Asia at Deutsche Bank AG, observed that ultimately, monetary policy will have to do the heavy lifting to support growth in 2025 and beyond, while fiscal policy continues on the path of consolidation.
Otherwise, there is a non-trivial risk of falling behind the curve. We think the time has come for the RBI to cut the policy repo rate in its February meeting by 25 bps and then another 25 bps in April policy,” he said, adding that sooner the rate cuts are delivered, the lesser will be the growth sacrifice.
