RBI to cut rates to boost economy as inflation slows

India's government has forecast annual growth of 6.4% in the year ending in March, its slowest pace in four years and below the lower end of its initial projection, weighed by a weaker manufacturing sector and slower corporate investments.

Mumbai: India is expected to cut interest rates for the first time in nearly five years on Friday to provide stimulus to its sluggish economy, with easing price pressures giving policymakers more room to manoeuvre.

The Monetary Policy Committee (MPC), which consists of three Reserve Bank of India (RBI) members and three external members, is widely tipped to reduce the repo rate by 25 basis points to 6.25 per cent, after having kept it unchanged for eleven straight meetings.

That would be the first rate cut since May 2020 and largely in line with analysts' expectations in a Reuters poll.

With a conventional rate cut largely factored in by markets, investors' focus will be on whether the central bank makes any other moves, such as liquidity measures, said Madhavi Arora, lead economist at Emkay Global Financial Services.

"Easing by stealth via unconventional policy tools like liquidity and regulatory measures will continue," she added.

India's government has forecast annual growth of 6.4 per cent in the year ending in March, its slowest pace in four years and below the lower end of its initial projection, weighed by a weaker manufacturing sector and slower corporate investments. For next year, growth is seen in a range of 6.3-6.8 per cent.

The government on its part last week announced tax cuts in its budget to boost spending and spur growth, while ensuring the fiscal deficit remains in check.

"With fiscal policy assuming a contractionary impulse on the back of a narrower deficit target for FY26, the monetary policy is likely to assume a growth supportive stance," DBS economist Radhika Rao said.

Though inflation still remains well above the RBI's medium-term target of 4 per cent, it eased to a four-month low of 5.22 per cent in December and is seen gradually declining towards the target in the coming fiscal year barring unexpected supply shocks, she added.

The MPC had changed its policy stance to neutral in October and cut banks' cash reserve ratio by 50 bps in December to ease liquidity stress in the banking system.

"We are expecting a 25-basis points cut with less likelihood of RBI changing stance as it is incumbent for the central bank to remain watchful of inflationary pressures emanating out of external and internal factors," economists at STCI Primary Dealership said in a note.