Analysts Predict RBI Will Lower Rates By 25 Basis Points

Economists anticipate that the Reserve Bank of India (RBI) will persist with its monetary policy easing cycle following the release of the minutes from the February meeting of the RBI Monetary Policy Committee (MPC). Although the extent of easing is expected to be limited, a reduction in the key lending rate is likely during the April meeting.

The RBI’s MPC convened for the first time under the leadership of newly appointed Governor Sanjay Malhotra from February 5 to February 7. The committee unanimously decided on a quarter-percentage-point cut in the repo rate, marking the first reduction in nearly five years. During discussions, all members emphasized the necessity of rate cuts to support sluggish economic growth, as inflation concerns have subsided.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Despite the dovish tone of the RBI’s statements, none of the MPC members provided explicit forward guidance due to prevailing global uncertainties. Consequently, they remain data-driven and maintain the flexibility to adapt to evolving economic conditions.

Some members of the committee also addressed the depreciation of the rupee. However, the majority agreed that policy rates should not be dictated by currency fluctuations. Economist Saugata Bhattacharya noted that the impact of currency depreciation is relatively minor, estimating that a 5% decline in the rupee results in an approximate 35-basis-point rise in consumer price index (CPI) inflation, while economic growth receives a 25-basis-point boost due to short-term export gains.

Regarding currency matters, Dr. Ranjan emphasized India’s strong macroeconomic fundamentals and significant growth potential. He highlighted the importance of maintaining high growth momentum over the medium term, advocating for a monetary policy approach that adapts to changing economic conditions. He also noted that capital flows into India are primarily influenced by its growth prospects rather than interest rate differentials—an observation seen in many emerging market economies.

Furthermore, he warned that using interest rates to defend the exchange rate could be counterproductive, particularly during periods of global capital outflows driven by external factors such as shifts in investor risk appetite or the strengthening of reserve currencies.

Domestic brokerage firm Emkay Global pointed out that while the initiation of the rate-cut cycle was anticipated, they foresee only a modest reduction of 25-50 basis points going forward. They also suggested that additional liquidity-enhancing measures are possible, including the postponement of liquidity coverage ratio (LCR) requirements and adjustments to project financing and expected credit loss (ECL) provisioning until the end of FY26, which they view as indirect easing.

Meanwhile, Nomura Holdings observed that the overall macroeconomic stance of the MPC reflects a benign inflation outlook alongside a weak economic recovery. They noted that concerns over currency depreciation are not expected to hinder further rate cuts. However, global uncertainties have prevented the committee from offering clear forward guidance, keeping policy decisions dependent on economic data.

Nomura continues to project additional rate cuts totaling 75 basis points—higher than the consensus estimate of 25-50 basis points—bringing the terminal rate to 5.50% by the end of 2025. They expect the next rate cut to take place in April.

Outlook on Economic Growth and Inflation

As India navigates its economic trajectory, experts emphasize the need for a balanced approach to monetary policy. While inflation has moderated in recent months, growth remains a concern, especially amid global economic headwinds. The RBI is expected to strike a careful balance between supporting domestic demand and maintaining financial stability.

With consumer spending and private investment showing signs of sluggishness, economists believe that monetary easing will help stimulate economic activity. However, they caution that the transmission of rate cuts to the real economy may take time, particularly given global uncertainties such as geopolitical tensions and volatile commodity prices.

Additionally, fiscal policy will play a crucial role in complementing monetary easing. Analysts suggest that government spending, particularly on infrastructure and rural development, will be key to sustaining growth momentum. The interplay between monetary and fiscal measures will be closely watched as policymakers attempt to steer the economy toward a stable and sustainable recovery.