RBI starts deliberations on interest rate amid expectations of 25 basis-points rate cut

Mumbai: Days after the Union Budget, the Reserve Bank of India (RBI) on Wednesday started deliberations on the monetary policy amid expectations of a 25 basis-points rate cut, which will be the first in five years, as inflation remains within central bank's comfort zone, though the sliding rupee continues to be a concern.

The Reserve Bank had last reduced the repo rate by 40 basis points to 4 per cent in May 2020 to help the economy tide over the crisis following the outbreak of the Covid pandemic and subsequent lockdown.

But in May 2022 the central bank started a rate hike cycle in view of the Russia-Ukraine war and paused it only in May 2023.

Newly appointed Reserve Bank Governor Sanjay Malhotra will be chairing his first Monetary Policy Committee (MPC) meeting starting Wednesday.

The decision of the six-member panel will be announced on Friday (February 7).

Experts opined that the situation is now conducive for a rate cut as it will complement the initiatives announced in the Union Budget to push a consumption-led demand growth.

An SBI research report said the consumer price index (CPI) based retail inflation is expected to come down to 4.5 per cent in the fourth quarter and average 4.8 per in the current financial year. It also said the January inflation numbers are trending closer to 4.5 per cent.

Given the fiscal stimulus and the uncertain impact of trade wars, RBI faces the delicate task of balancing the risks. As the fiscal stimulus plays out, the central bank at least in the short run has room for rate cuts, it said.

"We expect a 25-basis point rate cut in February 2025 policy. Cumulative rate cut over the cycle could be at least 75 basis points, with 2 successive rate cuts over February and April 2025. With an intervening gap in June 2025, the second round of rate cuts could start from October 2025," said the research report from the Economic Department of the State Bank of India (SBI).

Pradeep Aggarwal, founder and chairman, Signature Global (India) opined that a potential repo rate cut by the RBI in its upcoming MPC meeting could be a pivotal move in shaping India's economic momentum, particularly as the Union Budget 2025 is expected to drive consumption and investment.

"In the real estate sector, such a policy shift could lead to more affordable home loans, improving housing affordability and stimulating demand—especially in the mid and premium segments," Aggarwal said and added that given India’s rapid urbanisation and rising aspirations for homeownership, a proactive monetary policy can serve as a catalyst for long-term economic resilience and sustained real estate expansion.

Dhruv Agarwala, Group CEO, Housing.com said the real estate sector is keenly watching the RBI’s decision, hoping for measures that boost housing demand and affordability.

"A repo rate cut would provide much-needed relief to homebuyers, especially in the mid and affordable segments, where high loan rates remain a challenge," he said.

Agarwala further said that while luxury housing continues to thrive, balanced liquidity and lower borrowing costs are crucial for sustained demand across all categories.

Rohit Arora, CEO and co-founder, Biz2Credit and Biz2X said the RBI's decision to maintain the repo rate at 6.5 per cent for the 11th consecutive meeting reflects a steady-handed approach amidst global economic uncertainties.

For fintechs, this consistency provides a dual advantage of offering predictability for businesses planning credit-linked solutions and sustaining favourable borrowing conditions for MSMEs, a critical segment driving the economy, he said.

"The RBI’s balanced focus on inflation control and growth aligns well with the fintech ecosystem, enabling us to innovate and deploy technology that simplifies credit access and strengthens financial inclusion," Arora added.

Mandar Pitale- Head Treasury, SBM Bank India said while MPC is expected to take cognizance of the recent bouts of rupee depreciation and the resultant risk of imported inflation in the medium term, the comfort on the near-term trajectory of inflation and the need for giving further push to growth supportive measures, is expected to weigh on the decision making on rate action.

"Taking all these factors into consideration, it would be prudent to start the rate easing cycle in the forthcoming February MPC meeting with 25 bps cut retaining a neutral stance with a commitment to maintaining adequate durable systemic liquidity necessary for credit pick up," Pitale said.

The Union Budget presented in Parliament on Saturday has announced major income tax concessions to spur consumption, especially for the middle class with a view to boost demand.