RBI may cut rates on Feb 7 after five years, Governor Malhotra’s first policy in focus

For the first time in nearly five years, the Reserve Bank of India (RBI) could start cutting interest rates, making Governor Sanjay Malhotra’s first policy meeting one of the most closely watched in recent history.

In recent days, RBI has injected large amounts of liquidity into the banking system, which some experts interpret as a possible signal of a rate cut, despite inflation remaining relatively high.

A CNBC-TV18 monetary policy poll shows that 70% of market participants and economists expect a 25-basis point (bps) rate cut to support economic growth. However, 30% believe the RBI may hold rates steady to manage risks related to rupee depreciation.

Although liquidity remains tight, a cash reserve ratio (CRR) cut is unlikely at this point.

However, 60% of respondents expect additional liquidity measures, such as open market operations (OMOs), longer-duration repos, or a reduction in the incremental CRR for Non-Resident Indian (NRI) deposits.

Markets will also be watching for any updates on the new liquidity coverage ratio (LCR) norms which take effect from April 1, 2025.

Also Read: Expect 25-50 bps rate cut from RBI’s MPC on Feb 7, says CII President Sanjiv Puri

External factors add complexity to the RBI’s decision. While the central bank is expected to acknowledge risks from tariff threats, some market participants believe inflationary pressures and a weakening rupee could delay rate cuts. However, the broader view is that RBI will allow a gradual rupee adjustment while maintaining stability.

Markets are already pricing in deeper rate cuts beyond February, with expectations ranging between 75 and 100 basis points in this cycle to support economic growth.

Also Read: Neelkanth Mishra on RBI’s likely moves as tariff wars escalate

Despite expectations of rate cuts, the overall monetary policy stance is likely to remain neutral.

While 40% of market participants expect a slightly dovish tone, most others predict a neutral stance.

Economic growth projections are softening, with 90% of respondents expecting RBI to lower its FY25 gross domestic product (GDP) forecast to 6.4-6.5%, which could further justify rate cuts. However, inflation forecasts are unlikely to change in this policy.

Also Read: RBI may cut rates at its February 7 monetary policy meeting: SBI Research

All eyes are now on Governor Malhotra’s debut policy decision. Will he proceed with a rate cut, or remain cautious due to global risks? Markets will be watching closely.

For more details, watch the accompanying video

Catch all the latest updates from the stock market here