RBI Likely to Cut Rates by 75 bps, Beginning With 25 bps in February: SBI Research

Highlights:

• SBI Research expects a cumulative 75-bps rate cut in 2025
• First 25-bps rate cut anticipated in February, followed by another in April
• Further easing may resume in October 2025 after a pause in June
• Rate cut expected to boost consumption, alongside tax relief measures
• RBI has maintained repo rate at 6.5% since April 2023

RBI May Initiate Rate Cut Cycle With 25 bps Reduction in February

The Reserve Bank of India (RBI) is expected to cut its policy rate by 75 basis points (bps) over the upcoming easing cycle, starting with a 25-bps cut in February 2025, according to a recent SBI Research report.

“Cumulative rate cuts could be at least 75 bps, with two successive reductions in February and April 2025. After a pause in June, further rate cuts could begin in October 2025,” the report stated.

Factors Driving the Rate Cut Expectations

Several factors have strengthened the case for a monetary policy easing:

• Sluggish economic growth
• Government advance estimates indicating a slowdown
• Liquidity infusion measures undertaken by the RBI

On February 3, leading bankers and economists also projected a 25-bps rate cut in February, citing muted growth and the need for stimulus.

Impact of Rate Cuts on Consumption and Growth

A rate cut at this juncture could boost consumption demand, particularly when combined with the income tax relief announced in the Union Budget 2025.

The Finance Minister increased the tax rebate limit to ₹12.75 lakh per annum and raised the basic exemption limit from ₹3 lakh to ₹4 lakh under the new tax regime. Economists believe this additional disposable income, combined with lower interest rates, will spur spending and economic activity.

RBI’s Rate Trajectory: From Tightening to Potential Easing

The RBI has kept its policy repo rate unchanged at 6.5% since April 2023, following a 250-bps hike from May 2022 to February 2023 to control inflation.

During the December 2024 Monetary Policy Committee (MPC) meeting, the RBI held rates steady for the 11th consecutive time, signaling a commitment to aligning inflation with the 4% medium-term target.

However, the MPC shifted its stance from ‘Withdrawal of Accommodation’ to ‘Neutral’ in October 2024, indicating a readiness to adjust monetary policy in response to evolving economic conditions.

The anticipated rate cut cycle, starting with a 25-bps reduction in February, is expected to stimulate demand and economic growth. With inflation under control and economic growth slowing, analysts predict that the RBI will prioritize monetary easing in 2025.

The February 2025 MPC meeting will be closely watched for confirmation of this rate cut and its potential impact on India’s broader economic landscape.