'Growth-inflation dynamics have improved': RBI may cut repo rate by 25 bps this week

The Reserve Bank of India (RBI) is expected to cut the key interest rate by 25 basis points this week, marking its first reduction in nearly two years, according to news agency PTI. The move would complement the Union Budget's push to boost consumption-led demand, although the depreciating rupee remains a concern.

Since February 2023, the RBI has kept the repo rate—the short-term lending rate—unchanged at 6.5%. The last rate cut occurred during the COVID-19 pandemic in May 2020, after which rates were gradually increased to curb inflation. With retail inflation largely staying below the central bank’s comfort threshold of 6% for most of the year, experts believe the RBI now has room to shift focus toward stimulating economic growth, which has been hampered by sluggish consumption.

Newly appointed RBI Governor Sanjay Malhotra will chair his first Monetary Policy Committee (MPC) meeting starting Wednesday. The decision of the six-member panel will be announced on Friday, February 7.

“There is a higher probability of a rate cut this time for two reasons. First, the RBI has already announced liquidity enhancement measures, which have improved conditions in the market. This appeared to be a prerequisite for cutting rates,” Madan Sabnavis, Chief Economist at Bank of Baroda, was quoted as saying by PTI. He added that the Union Budget’s boost to consumption provides a timely backdrop for the RBI to lower rates in tandem.

On January 27, the RBI infused ₹1.5 lakh crore into the banking system to enhance liquidity, setting the stage for potential rate adjustments. Sabnavis also noted that the RBI might revise its growth forecast, currently pegged at 6.4% by the National Statistical Office (NSO). While growth projections for FY26 are typically released in April, any indication in this policy will be closely watched.

Aditi Nayar, Chief Economist and Head of Research at ICRA, echoed similar sentiments. “The growth-inflation dynamics have improved since the December 2025 policy meeting. We don’t assess the fiscal stimulus provided by the Union Budget to have a significant bearing on inflation. Accordingly, we think the balance is tilted in favour of a rate cut in the February 2025 policy review,” she said.

However, Nayar cautioned that global factors could still influence the RBI’s decision. A sharp depreciation of the rupee, especially against the US dollar, might prompt the central bank to delay the rate cut until April 2025. On Monday, the rupee hit an all-time low, closing at 87.17 per dollar, raising concerns about potential currency volatility.

The Union Budget presented on Saturday announced significant income tax concessions aimed at stimulating middle-class consumption, which, coupled with a potential rate cut, could provide a much-needed boost to domestic demand.

(With inputs from PTI)