Posted on February 7, 2025, by Niftynews
The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) is poised to announce its first monetary policy decision under the leadership of RBI Governor Sanjay Malhotra. Financial experts are widely predicting that the central bank will opt for a 25 basis points (bps) reduction in the repo rate. This policy move is seen as a balanced approach, aimed at stimulating economic growth while carefully managing inflationary pressures.
Why a Repo Rate Cut is Likely
As of now, the repo rate stands at 6.50 percent, a level that has been unchanged for the last 11 consecutive policy meetings. Despite concerns about inflation, there has been a noticeable easing in the prices of essential commodities in recent months. According to a report by Bank of Baroda, inflationary pressures have been cooling off, primarily due to a decline in the prices of vegetables such as tomatoes, onions, and potatoes. The improved supply of these critical food items has helped reduce volatility in the Consumer Price Index (CPI), giving RBI Governor Sanjay Malhotra room to maneuver.
The report states, “Considering the macroeconomic conditions and geopolitical factors, we believe there is space for a 25 bps rate cut in the upcoming monetary policy.” As inflation appears to be under control, the RBI has an opportunity to make this move to further support economic growth without stoking inflationary concerns.
Inflation and Growth Balance
Governor Malhotra monetary policy decisions are likely to focus on maintaining a balance between controlling inflation and promoting economic growth. While inflation has moderated in some areas, the RBI is still cautious of potential inflationary pressures stemming from external factors. The upcoming policy review will be keenly watched as investors and analysts await insights into how the RBI plans to manage these competing priorities.
The RBI’s inflation target remains around 4 percent, with flexibility of a band of +/- 2 percent. However, it is anticipated that the RBI will take a pragmatic approach, taking into account both the domestic and global economic landscape. The 25 bps cut would signal that the central bank is looking to boost demand and consumption, as economic growth in India remains strong, but concerns about global factors persist.
Repo Rate Cuts and Liquidity Management
Alongside the anticipated rate cut, there is growing discussion about the need for additional liquidity measures. Analysts believe that liquidity remains a significant concern in the Indian banking system, despite the relatively stable repo rate. While a 25 bps rate cut would reduce borrowing costs for businesses and consumers, more needs to be done to ensure adequate liquidity flows smoothly through the banking sector.
A report from Emkay Research indicates that market participants are looking for more than just rate cuts; they are expecting comprehensive measures to address liquidity challenges. While the RBI is expected to maintain a vigilant stance on inflation, additional liquidity provisions could be announced to support the banking system’s functioning and ensure credit growth in the economy.
Impact on Economic Growth and Future Projections
The RBI has projected India’s real GDP growth for the financial year 2024-25 to be at 7.2 percent, a figure that remains positive despite global uncertainties. The Economic Survey has estimated growth at 6.4 percent, in line with the projections from the National Statistical Office (NSO). However, the central bank will likely be cautious with its monetary policy, as any further rate cuts will depend on ongoing inflation trends and the overall stability of the economy.
Given India’s strong growth outlook, the focus will be on balancing fiscal stimulus with inflation control. The expected 25 bps repo rate cut would likely be a response to India’s positive growth trajectory while addressing liquidity concerns and inflation risks.
Governor Malhotra’s First Policy Stance: What to Expect
The upcoming policy announcement will mark RBI Governor Sanjay Malhotra’s first monetary policy stance since assuming office. As market participants await his decision, all eyes will be on how the Governor addresses key issues such as inflation, repo rates, and liquidity management. If the RBI does indeed cut the repo rate, it will be seen as a signal that the central bank is committed to supporting economic growth in the country.
Governor Malhotra will also need to consider external factors, such as global economic conditions and geopolitical uncertainties, which could potentially affect India’s economic stability. Any additional steps that the RBI takes, such as liquidity injections or targeted measures, will provide valuable insights into how the new Governor plans to navigate India’s economic future.
Conclusion
In conclusion, RBI Governor Sanjay Malhotra’s first policy move could see a 25 bps reduction in the repo rate, driven by easing inflationary pressures and a need to stimulate growth in the Indian economy. However, the decision will likely go beyond just a rate cut, with a focus on addressing liquidity concerns and balancing growth with inflation control. Investors and market participants are eagerly awaiting further details in the upcoming policy review, which will set the tone for India’s monetary policy for the remainder of 2025.
