The newly appointed Governor of the Reserve Bank of India (RBI), Sanjay Malhotra, will announce this year’s monetary policy on February 7, 2025. The upcoming Monetary Policy Committee meeting is significant, as it will mark the Governor’s first policy review amid ongoing economic challenges and high expectations.
Historically, monetary policy has had a significant impact on financial markets. By analysing past trends and considering various factors, we can assess the expectations of the RBI monetary policy 2025.
So, stay tuned to this blog to gain insights!
Will RBI Announce a Rate Cut?
In the upcoming meeting of the Monetary Policy Committee (MPC), RBI is expected to announce a cut in the repo rate by 25 basis points. If so, it would be the first interest rate cut since 2020. However, these changes will remain finely balanced.
Several factors support rate cuts, including slow economic growth, the government’s advance estimates, and efforts to boost banking system liquidity. Given the global uncertainties, the central bank may instead prioritise liquidity measures and defer the decision until the April policy review.
In the past week, RBI announced plans to put ₹1.5 lakh crore into the banking system after injecting ₹1.16 lakh crore by 50 basis points reduction in the cash reserve ratio. Further, inflation is a persistent challenge. It remains above the RBI’s medium-term target of 4%, and the increasing trade-related issues globally make it worse economically.
The recently announced budget indicates a downward trend in interest rates. However, from a wider perspective, things seem clear, so the precise timing of the next cut remains uncertain.
Key Factors Influencing a Repo Rate Cut Decision
While a repo rate cut is one of the major expectations of the RBI monetary policy 2025, it’s important to note that several factors can influence this decision. The following are key elements that will significantly impact the outcome.
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Economic Growth
If India’s GDP growth slows, RBI may decide to cut rates to stimulate demand and investments. The quarterly growth rate for the second quarter of 2024-25 was 5.4%. This shows a sharp decrease from the 6.7% growth rate in the first quarter of 2024-2025. The downward trend reflects the concerns over weakening domestic demand and global economic anticipations.
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Inflation Trends
One of RBI’s primary goals is to control inflation. A repo rate cut is likely when inflation, particularly Consumer price (CPI) based inflation, is within the RBI’s target range.
In December 2024, the annual inflation rate in India eased to 5.22% from 5.38% the previous month, primarily due to a slowdown in food price hikes. This is loosely aligned with expectations of 5.3% and remains within the RBI’s target of within two percentage points of 4%. However, core inflation, which excludes volatile food and fuel prices, remains elevated, indicating persistent price pressures in other sectors.
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Fiscal Policy and Government Borrowing
If the government runs a high fiscal deficit, excessive borrowing can lead to higher yields, making it challenging for the RBI to cut rates.
Recently, with the Union Budget release, the government reduced tax rates to boost spending and spur growth. The net tax is estimated at ₹28.37 lakh crore.
The fiscal deficit is estimated to be 4.4 percent of GDP, and gross borrowing is approximately ₹14.82 lakh crore. Monetary and fiscal policy coordination is prominent in determining the timing of repo rate cuts.
Conclusion
Stakeholders are waiting for the monetary policy committee to conclude the meeting and the RBI monetary policy 2025 expectations are optimistic. The governor will announce the repo rate on February 7.
With all the speculations going around, prediction about repo rate cuts is expected to boost economic growth. However, RBI takes such measures only after careful consideration of certain factors, including inflation trends, fiscal policy, and borrowings.
Moreover, whatever the committee decides in the meeting will guide India’s monetary policy trajectory in the coming months, influencing economic growth and investor confidence.
