Economists Forecast Repo Rate Of 5.75% By Mid-2025 Amid Mounting Growth Concerns

Economists anticipate that the Reserve Bank of India (RBI) will lower the repo rate by 25-50 basis points (bps), bringing it down to 5.7% in response to concerns about economic growth. Additionally, experts suggested that the central bank may introduce further liquidity measures due to the ongoing tightness in liquidity conditions.

"Looking ahead, we foresee only a limited rate cut cycle of 25-50 bps, accompanied by possible liquidity easing measures," stated Madhavi Arora, Chief Economist at Emkay Global Financial Services.

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Similarly, a report by Kotak Research predicts another 25-50 bps rate cut in FY26, citing the RBI’s increased tolerance for rupee depreciation and the inflation trajectory aligning with the 4% target, barring any supply shocks.

Expectations for another rate cut have risen following concerns expressed by the Monetary Policy Committee (MPC) members in the February policy minutes, along with signs of easing inflation.

"There has been a shift in the domestic growth-inflation dynamics since the December 2024 policy. While inflation has shown a sequential decline, growth outcomes have been weaker. Additionally, uncertainties arising from global financial markets and trade policies have further clouded the outlook for domestic growth and inflation," remarked RBI Deputy Governor M. Rajeshwar Rao.

Furthermore, RBI Governor Sanjay Malhotra noted that, given the macroeconomic outlook and expectations of inflation aligning with the target, a lower policy rate appears more suitable at this juncture, considering the forward-looking nature of monetary policy.

In its February monetary policy review, the central bank reduced the repo rate by 25 basis points to 6.25%, while keeping the rates for the Standing Deposit Facility, Marginal Standing Facility, and bank rates unchanged at 6.5%.

Between May 2022 and February 2023, the RBI increased the repo rate by a total of 250 basis points. Since April 2023, it has held the repo rate steady at 6.5% to curb inflation and guide it toward the medium-term target of 4%. For FY26, the central bank has projected a real GDP growth rate of 6.7%.

Before this, the Economic Survey 2025 estimated a real GDP growth of 6.4% for FY25—20 basis points lower than the RBI’s forecast in its December monetary policy. The survey also highlighted that India's real GDP growth is expected to range between 6.3 and 6.8% in FY26, indicating "moderate prospects influenced by multiple headwinds, including a potential global trade war and disruptions caused by artificial intelligence (AI)."

According to Kotak’s report, MPC members agreed that a monetary policy easing would complement the tax reductions in the FY2026 Union Budget, supporting economic growth.

External MPC members pointed out that the RBI had revised its growth forecast downward for FY2025. Nagesh Kumar noted that "moderation in urban consumption, affecting demand for durable goods, along with sluggish private investment, is weakening the manufacturing sector." Meanwhile, Ram Singh highlighted that slow real wage growth has led to a decline in private consumption. Separately, Saugata Bhattacharya emphasized the need to lower interest costs for small enterprises.

Economists further noted that liquidity concerns, which have been in focus over the past two months despite RBI’s interventions, are likely to receive additional support in the coming days.

In recent months, the central bank has implemented several measures to improve liquidity in the banking system, including daily variable rate repo (VRR) operations, open market operations (OMO) involving government securities purchases, and USD/INR buy/sell swap auctions.

Despite these efforts, liquidity remains in a significant deficit of approximately ₹2.34 lakh crore.

Additional Economic Considerations

The potential rate cuts are being closely monitored by market participants, as lower interest rates could boost credit growth and investment activity. However, concerns remain regarding the impact of a softer monetary stance on inflationary pressures, especially if global commodity prices rise or if there are unforeseen supply chain disruptions.

Financial experts also point out that a reduction in the policy rate could provide relief to borrowers, particularly those with home loans and business loans linked to the repo rate. Lower borrowing costs could enhance consumer spending and investment, which in turn may support economic recovery in key sectors such as real estate, manufacturing, and infrastructure.

Moreover, analysts suggest that the RBI’s approach will be influenced by global central banks, particularly the U.S. Federal Reserve. If the Fed signals an extended period of high interest rates, the RBI may exercise caution to prevent excessive capital outflows and ensure financial stability.

Additionally, the banking sector's response to liquidity support measures will be crucial in determining the extent to which rate cuts translate into increased lending activity. While the RBI has taken steps to address the liquidity shortfall, the banking system still faces challenges in ensuring adequate credit availability, particularly for small and medium enterprises (SMEs) and rural sectors.

As the fiscal year progresses, the RBI is expected to maintain a balanced approach, ensuring that monetary policy supports growth while keeping inflation within target levels. The next few months will be critical in shaping the direction of interest rates and overall economic policy.