Highlights
- RBI expected to cut repo rate to 5.75% by mid-2025, driven by slowing economic growth and easing inflation.
- Monetary Policy Committee (MPC) members express concerns over growth slowdown and global economic uncertainties.
- Kotak Research and Emkay Global predict a shallow rate cut cycle of 25-50 basis points (bps).
- Liquidity concerns persist, despite RBI’s Open Market Operations (OMO) and Variable Rate Repo (VRR) measures.
- MPC signals that lower interest rates would complement tax cuts in the FY2026 Union Budget to support economic expansion.
RBI Likely to Cut Repo Rate to 5.75% Amid Economic Slowdown
Economists anticipate that the Reserve Bank of India (RBI) will reduce the repo rate by 25-50 basis points (bps), bringing it down to 5.75% by mid-2025. The expectation for a rate cut has gained momentum following the February Monetary Policy Committee (MPC) meeting minutes, which highlighted growing concerns over economic growth.
The current repo rate stands at 6.25% after the RBI implemented a 25 bps cut in February 2025, while the Standing Deposit Facility, Marginal Standing Facility, and Bank Rates remain at 6.5%.
Economic Slowdown and Inflation Trajectory Drive Rate Cut Expectations
According to Madhavi Arora, Chief Economist at Emkay Global Financial Services, the RBI is likely to undertake a shallow rate-cut cycle of 25-50 bps, accompanied by additional liquidity measures to address tight market conditions.
Similarly, Kotak Research forecasts another 25-50 bps rate cut in FY26, attributing it to:
- RBI’s increased tolerance for a weaker Indian rupee.
- Inflation expected to ease toward the 4% target in the absence of supply shocks.
The Economic Survey 2025 estimates India’s real GDP growth at 6.4% for FY25, which is 20 bps lower than the RBI’s December projection. For FY26, real GDP growth is projected between 6.3-6.8%, reflecting moderate growth prospects amid rising global trade tensions and AI-driven disruptions.
MPC Members Express Concerns Over Growth and Inflation Balance
RBI Deputy Governor M. Rajeshwar Rao noted that since the December 2024 policy meeting, domestic growth has weakened despite sequential softening in inflation. He also cited rising uncertainties in global financial markets and trade policies as additional risks to India’s growth and inflation outlook.
Meanwhile, RBI Governor Sanjay Malhotra indicated that a lower policy rate would be more appropriate, given that inflation is aligning with the RBI’s target and that monetary policy must be forward-looking.
MPC members also observed that:
- Weak urban consumption and subdued private investment are affecting India’s manufacturing sector (Nagesh Kumar).
- Real wage growth remains sluggish, impacting private consumption and demand (Ram Singh).
- Interest cost reductions for small enterprises would provide much-needed relief (Saugata Bhattacharya).
Liquidity Concerns Persist Despite RBI’s Measures
Despite the RBI’s ongoing efforts to inject liquidity, market liquidity remains in a significant deficit of approximately ₹2.34 lakh crore.
Over the past few months, the central bank has introduced various liquidity support measures, including:
- Daily Variable Rate Repo (VRR) operations.
- Open Market Operations (OMO) for government securities purchases.
- USD/INR buy/sell swap auctions.
Economists believe that additional liquidity support measures will be necessary in the coming weeks to prevent further tightening of market conditions.
MPC Signals Rate Cut to Complement Fiscal Policy
The Monetary Policy Committee (MPC) agrees that a monetary easing stance would align with fiscal measures, such as tax cuts in the FY2026 Union Budget, to support economic growth.
With RBI’s growth forecast for FY25 revised downward, policymakers suggest that monetary and fiscal coordination will be crucial in navigating ongoing economic challenges.
Outlook: A Gradual Rate Cut Cycle with Liquidity Support
While the RBI is expected to implement a gradual rate-cut cycle, it will closely monitor inflation trends, economic growth data, and global financial conditions before making further policy adjustments.
With growth momentum slowing and inflation easing, the central bank is likely to maintain an accommodative stance in 2025, ensuring that the economy remains resilient to global headwinds.
