Posted on February 6, 2025, by Niftynews
The Reserve Bank of India (RBI) upcoming monetary policy announcement on February 7, 2025, has garnered significant attention. As the country’s economy faces growth challenges and inflationary pressures ease, there is a growing expectation that RBI Governor Sanjay Malhotra may take decisive action by implementing a 25 bps rate cut. This article explores the five critical reasons why Governor Malhotra may act quickly and not delay the rate cut decision.
1. Slowing GDP Growth: A Clear Call for Stimulus
India’s Gross Domestic Product (GDP) has been slowing, with a disappointing growth rate of 5.4% in Q2FY25, marking its weakest in nearly two years. This trend reflects the economic slowdown in multiple sectors. A rate cut would aim to revive demand, stimulate investment, and prevent further stagnation. Experts argue that the RBI’s rate cut could help address this growth challenge, providing the necessary economic stimulus to support a recovery in the coming quarters.
According to Economic Survey 2025, India’s GDP growth is expected to hover around 6.4% in FY25. Although it is expected to be close to the decadal average, India’s economic trajectory is not immune to global challenges, making a rate cut necessary to boost domestic economic activity.
2. Easing Inflation: The Perfect Environment for a Rate Cut
India’s retail inflation has been steadily easing, with the Consumer Price Index (CPI) falling to a 4-month low of 5.22% in December 2024. This marks a sharp decline from previous months. The expectation of moderated inflation creates an ideal environment for the RBI to make a move. As inflation risks have reduced, the RBI now has more room to maneuver with a rate cut without risking an inflationary surge.
The RBI aims to achieve its target of 4% CPI inflation in the medium term. As inflationary pressures are expected to stay under control, experts believe that a 25 bps rate cut would be an appropriate and effective monetary policy tool to sustain this trend.
3. Stable Oil Prices: Reducing Inflation Risks
Global oil prices play a crucial role in determining inflationary trends, especially in an oil-importing economy like India. However, oil prices have remained relatively stable, reducing potential inflation risks. With lower inflation from energy costs, the RBI faces less pressure from external factors. Therefore, the RBI Governor is likely to feel more confident about implementing a rate cut, as oil price volatility no longer poses a significant threat to inflation control.
4. Global Economic Uncertainty: US Fed’s Rate Cuts and Impact on India
While global uncertainty remains a concern, the US Federal Reserve’s recent decision to pause interest rate hikes signals a potential shift in the global monetary landscape. Although the US Fed is expected to act sooner than anticipated, experts argue that the RBI is more likely to focus on domestic economic conditions than on global developments.
Despite external economic turbulence, Governor Malhotra may see a rate cut as an appropriate response to stimulate growth and liquidity. With global economies like the US easing monetary policies, India’s RBI may follow suit, focusing on domestic growth needs over external shocks.
5. Liquidity Support: Ensuring Financial Stability
Experts, including Joseph Thomas, believe that a rate cut is not just about stimulating growth but also enhancing liquidity in the system. Liquidity plays a critical role in ensuring businesses and consumers have access to affordable credit. A 25 bps rate cut would be designed to ease financial conditions, thereby boosting investment and supporting a quicker recovery from the current slowdown.
The RBI’s focus on liquidity enhancement will help foster economic recovery, enabling industries to borrow at cheaper rates, thereby encouraging investment in growth-oriented sectors.
Conclusion: A Likely Action from the RBI
As India navigates its economic challenges in 2025, Governor Sanjay Malhotra and the RBI Monetary Policy Committee (MPC) are tasked with making decisions that balance inflation control and economic growth. Given the current economic landscape, Sanjay Malhotra decision to implement a 25 bps rate cut on February 7, 2025, seems highly probable.
With GDP growth slowing, inflation risks easing, and global economic uncertainties continuing, the RBI is likely to act swiftly to help bolster domestic demand and investment. As Governor Malhotra takes center stage, it will be crucial to see how the RBI navigates this delicate economic situation with monetary policy adjustments aimed at fostering growth.
