RBI likely to cut interest rates by at least 25 bps

 New Delhi: The Reserve Bank of India (RBI) is widely expected to cut interest rates by at least 25 basis points at its Monetary Policy Committee (MPC) meeting, which begins today. This is the first MPC meeting since Sanjay Malhotra took charge as the RBI Governor.

A rate cut would lower borrowing costs on home, vehicle, and personal loans. The official announcement on interest rates is scheduled for Friday at 10 am.

The RBI is also expected to adopt measures to stimulate economic growth, as outlined in the Union budget last week.

However, uncertainty lingers over the ongoing trade policies initiated by US President Donald Trump, and it remains to be seen whether they will impact MPC's decision-making process.

Meanwhile, the central government has repeatedly expressed concerns that high interest rates stifle economic growth. Former RBI Governor Shaktikanta Das resisted cutting interest rates even in his final MPC meeting, citing the persistent risk of inflation.

However, Finance Secretary Tushin Kanta Pandey recently stated that the latest Union Budget, presented by Finance Minister Nirmala Sitharaman, would not trigger inflationary pressures. He emphasised that the final decision on interest rates to stimulate economic growth now rests with the MPC, signalling the government’s expectation of a rate cut.

Further reinforcing this anticipation, Pandey remarked that the RBI’s monetary policy and the government's economic policy should move in the same direction rather than working against each other. Adding to the speculation, State Bank of India Chairperson CS Setty also stated in an interview a few weeks ago that a rate cut was imminent in February.

The RBI has not revised its base interest rates since February 2023. The last rate cut was implemented in 2020 during the pandemic, followed by gradual increases as inflation rose in the post-pandemic period.

Factors favouring a rate cut
Easing inflation: Inflation, which peaked at a 14-month high of 6.2 per cent in October, declined to 5.2 per cent in December. Food inflation has also dropped significantly.

Signs of economic recovery: Although GDP growth slowed in the second quarter (July-September), it is expected to have improved in the third quarter.

Agricultural stability: A good Kharif harvest and favourable conditions for the Rabi season suggest inflationary pressures from the agricultural sector will remain low.

Industrial and service sector growth: Improved performance in these key sectors strengthens the case for an interest rate cut.