RBI Policy: Why is the RBI Monetary Policy Committee (MPC) likely to cut the Repo Rate starting in 2025?

The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) is scheduled to meet from February 5 to 7, 2025. This meeting is expected to mark the first repo rate cut in nearly five years, reflecting the central bank’s shift towards supporting economic growth. The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is expected to reduce the repo rate in 2025 due to multiple economic and financial factors. These include slowing economic growth, easing inflation, global economic conditions, fiscal policy directions, and market expectations.

 Coming up:
🎙️Monetary Policy Statement by #RBI Governor @GovSMalhotra
on February 07, 2025, at 10:00 am Watch live at: https://t.co/8hggoLmFRT

🎥Live telecast of the Post-Policy Press Conference at… pic.twitter.com/4OiCEzoD5R

— ReserveBankOfIndia (@RBI) February 6, 2025

Why is the RBI Monetary Policy Committee (MPC) likely to cut the Repo Rate in 2025?

Key reasons for cutting the Repo Rate are:

1. Economic Growth Concerns

• India’s economic momentum has slowed, with Q1 FY2025 GDP growth at 6.7%, below RBI’s 7% projection.
• Key economic indicators, such as:
• Declining vehicle sales
• Lower cement volumes
• Reduced GST collections
• A repo rate cut could help boost economic activity by making loans cheaper for businesses and consumers.

Impact

• Encourages borrowing and investments
• Supports overall economic recovery
• Helps businesses expand amid sluggish demand

2. Inflation Trends

• Inflation, while fluctuating, is projected to decline with a forecasted rate of 4.4% for Q1 2025-26.
• Lower inflation provides room for monetary easing, reducing borrowing costs and stimulating demand.

Impact

• A lower repo rate can support consumption and investments
• Controlled inflation ensures rate cuts do not cause overheating

3. Global Economic Environment

• The strengthening of the US dollar has led to rupee depreciation (nearly 2% YTD), making it the worst-performing Asian currency.
• Geopolitical tensions and trade uncertainties are impacting India’s external sector.
• To counter global headwinds, the RBI may ease monetary policy to maintain stability.

Impact

• Supports domestic liquidity amid external shocks
• Encourages capital inflows to counter currency depreciation

4. Fiscal Policy Considerations

• The recent budget focused on tax cuts for the urban middle class but lacked major economic reforms.
• RBI has already:
• Infused liquidity into the banking system.
• Relaxed regulations for non-bank lending.
• These steps suggest a monetary policy shift towards easing in 2025.

Impact

• Complements fiscal policies to drive economic growth
• Supports credit expansion to businesses

5. Market Expectations

• Market participants are anticipating rate cuts, evidenced by:
• Foreign investors purchased ₹182 billion ($2.09 billion) in Indian government bonds in a single week.
• Surpassing total foreign debt purchases in the previous 19 weeks combined.
• Rate cuts would make Indian assets more attractive to investors.

Impact

• Encourages further foreign investments
• Stabilizes the bond market and currency value

What is a Repo Rate Cut Expected?

Several economic and policy factors support the possibility of a repo rate cut:

1. Declining Inflation

• Retail inflation (CPI) has eased to 5.22% in December 2024, down from 5.48% in November 2024.
• Lower inflation strengthens the case for reducing borrowing costs to spur economic activity.

2. Slowing GDP Growth

• GDP growth in Q2FY25 slowed to a seven-quarter low of 5.4%, down from 6.7% in Q1FY25.
• The National Statistics Office (NSO) had projected an overall 6.4% GDP growth for FY25.

3. Liquidity Injection Measures by RBI

The RBI has recently taken several steps to enhance liquidity in the banking system:

• $5 billion forex swap
• ₹60,000 crore of open market operations
• ₹50,000 crore worth of 56-day variable rate repo operations

These measures indicate RBI’s preparedness for a rate cut.

4. Budget 2025 Measures

• The Union Budget 2025-26 introduced personal income tax cuts and revised TDS limits, aimed at boosting disposable income and consumption.
• With inflation moderating and the need for economic stimulus rising, a rate cut aligns with the government’s fiscal strategy.

5. Global Economic Uncertainty

• The resurgence of trade tensions (e.g., US tariffs on China, Mexico, and Canada) has caused volatility in global markets.
• The rupee has depreciated to 87.29 per dollar, raising concerns about imported inflation and prompting RBI to take countermeasures.

What are the Market Implications of a Repo Rate Cut in 2025?

1. Impact on Borrowers

• If the repo rate is cut to 6.25% from 6.50%, external benchmark lending rates (EBLRs) linked to the repo rate will decrease by 25 bps.
• Loan EMIs for home, car, and personal loans will become cheaper.
• Interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR) may also decline, though full transmission may take time.

2. Impact on the Banking Sector

• A reduction in repo rates leads to lower interest income for banks.
• However, improved liquidity and reduced borrowing costs could increase credit demand, benefiting the overall economy.

3. Impact on Investments and Stock Markets

• A rate cut could boost equity markets, especially sectors like real estate, infrastructure, and banking.
• Investors may shift towards equities and bonds, anticipating higher growth and lower financing costs.

What will be the Projected Monetary Policy Path in 2025?

Economists predict that the RBI will adopt a gradual approach to easing monetary policy:

The State Bank of India (SBI) economic research report suggests cumulative rate cuts of at least 75 bps in 2025.

Governor Sanjay Malhotra: Key Decisions Awaited

Who is Sanjay Malhotra?

Policy Direction Under Malhotra

• It is likely to depart from the hawkish stance of his predecessor, Shaktikanta Das.
• Expected to balance inflation control with economic growth.
• Emphasis on strengthening financial stability and ensuring liquidity sufficiency.

Conclusion

The MPC meeting from February 5-7, 2025, is expected to result in a repo rate cut of 25 bps, marking the first reduction in nearly five years. The decision is driven by falling inflation, slowing GDP growth, and RBI’s proactive liquidity measures. If implemented, it will lower loan EMIs, boost credit demand, and support economic recovery.

However, global trade uncertainties, rupee volatility, and future inflation trends will play a crucial role in determining the RBI’s monetary stance in subsequent meetings.