Mumbai: Experts believe that the Reserve Bank of India (RBI) is poised to reduce the key interest rate by 25 basis points this week, marking the first rate cut in two years. The move is expected to complement the Union Budget’s efforts to stimulate consumption-led demand, despite concerns over the depreciating rupee.
Table of Contents
Retail Inflation Within Comfort Zone
With retail inflation remaining within the RBI’s target range of less than 6% for most of the year, experts suggest that the central bank may now take action to boost economic growth, which has been hampered by sluggish consumption.
The RBI has kept the repo rate, or short-term lending rate, unchanged at 6.5% since February 2023. The last rate cut came during the COVID-19 pandemic in May 2020, after which the rate was gradually raised to its current level of 6.5%.
Also Read: Indian Rupee Hits Record Low: Is a Global Trade War Behind the Fall? Here is What We Know
Sanjay Malhotra’s First MPC Meeting
The decision will be made during the first Monetary Policy Committee (MPC) meeting chaired by newly appointed RBI Governor Sanjay Malhotra. The meeting will start on Wednesday, with the final announcement scheduled for Friday, February 7.
Reasons Behind the Likely Rate Cut
Madan Sabnavis, Chief Economist at Bank of Baroda, believes there is a high probability of a rate cut this time due to two main factors. First, the RBI has already implemented liquidity enhancement measures, improving market conditions, which is seen as a prerequisite for reducing rates. Second, the Union Budget has provided a boost to the economy, making it appropriate for the RBI to cut rates in tandem.
On January 27, the RBI announced measures to infuse ₹1.5 lakh crore worth of liquidity into the banking system.
Potential Adjustments to Growth Forecasts
Experts also expect the RBI to revise its growth forecasts during the policy review. The National Statistical Office (NSO) had earlier projected a growth rate of 6.4% for the year. It remains to be seen whether the RBI will offer a forecast for FY26, which is typically announced during the April policy.
Inflation and Growth Dynamics
Aditi Nayar, Chief Economist at Icra, pointed out that the growth-inflation dynamics have improved since the December 2023 policy meeting. However, she noted that the fiscal stimulus from the Union Budget is not expected to significantly impact inflation. As a result, Nayar believes the balance of factors is tilted in favor of a rate cut in February 2024.
Impact of Global Factors on the Rupee
Despite the anticipated rate cut, there are concerns about the weakening rupee. On Monday, the rupee fell by 55 paise to close at an all-time low of 87.17 (provisional) against the US dollar. Nayar noted that if global factors lead to further depreciation of the rupee, the rate cut may be delayed until April 2024.
Union Budget’s Focus on Consumption
The Union Budget, presented in Parliament on Saturday, includes major income tax concessions aimed at stimulating consumption, particularly for the middle class, in an effort to boost demand.
