SUMMARY
Brokerage firm Prabhudas Lilladher expects the RBI monetary policy committee (MPC) will cut rates by 25 basis points on February 7.
As the Reserve Bank of India (RBI) gears up for its monetary policy review on February 7, all eyes are on its interest rate decision. Here are five reasons why brokerage firm Prabhudas Lilladher believes the central bank’s monetary policy committee (MPC) will cut rates by 25 basis points on Friday.
Moderating inflation: Retail inflation (CPI) eased to 5.2% in December 2024 and is expected to decline further to 4.5-4.7% in the coming months, giving the RBI room to cut rates. However, risks from imported inflation persist due to a weakening rupee.
Growth slowdown: GDP growth for 2024–25 (FY25) is projected to slow down to 6.4%, from 8.2% last year, driven by weak investments and cautious consumption. A rate cut could help stimulate demand and support economic activity amid these challenges.
Liquidity concerns: Liquidity conditions have tightened sharply, with durable liquidity in deficit, forex reserves declining to $1.4 billion in January 2025, and credit growth plateauing at 11.5% YoY. A rate cut would ease funding costs for banks, improving their ability to lend and supporting liquidity in the financial system.
Global Uncertainty: Risks remain elevated with the US Federal Reserve’s rate trajectory uncertain and ongoing tariff wars leading to capital outflows. A rate cut might cushion the economy from external shocks by supporting domestic demand and investments.
Budget push: With Budget 2025 focusing on tax cuts and a capex boost to drive growth, fiscal policy has taken the lead. This allows the RBI to prioritise financial stability while offering modest monetary support through rate cuts. Image: Shutterstock