RBI MPC Meeting 2025 Expectations: Will RBI Governor Cut Rates Tomorrow?

India’s newly appointed central bank governor is expected to implement an interest rate reduction during his first policy meeting, signaling a shift toward prioritizing economic growth amid rising global uncertainties.

Sanjay Malhotra, who assumed office in mid-December, is anticipated to take a different approach from his predecessor, Shaktikanta Das, who maintained a strict stance on inflation control, keeping interest rates unchanged for two years to pursue a 4% inflation target.

According to a Bloomberg survey of economists, the Reserve Bank of India (RBI) is likely to lower the benchmark repurchase rate by at least 25 basis points to 6.25% on Friday. Some analysts suggest Malhotra might surprise the market with a more aggressive 50-basis-point cut.

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Malhotra is leading a nearly revamped six-member monetary policy committee. Deputy Governor M. Rajeshwar Rao is temporarily filling in for Michael Patra, who retired last month, while three external members joined the committee in October.

A seasoned bureaucrat and former revenue secretary in the Finance Ministry, Malhotra has not yet made public statements since assuming office, making it challenging to determine his stance on inflation and currency management. However, sources within the RBI indicate that he may adopt a less interventionist approach to the rupee compared to his predecessor, allowing it to move in line with global trends.

The case for an interest rate cut has strengthened following recent economic data showing slower-than-expected growth. Additionally, market turmoil triggered by U.S. President Donald Trump’s fresh tariff threats has added to global uncertainty. If the RBI moves forward with a rate reduction, it would come on the heels of Prime Minister Narendra Modi’s recent $12 billion tax cuts aimed at stimulating the economy.

Kaushik Das, India’s chief economist at Deutsche Bank AG, noted that monetary policy would play a crucial role in sustaining growth beyond 2025. Failing to act now, he warned, could put the RBI at risk of falling behind economic trends.

Malhotra is set to announce the rate decision in a televised address at 10 a.m. in Mumbai.

Key Aspects Analysts Will Monitor:

Interest Rate Strategy

Investors and economists will pay close attention to Malhotra’s policy statement and press conference to assess whether he remains committed to achieving the 4% inflation target set by his predecessor. Additionally, analysts will look for clues about the depth and duration of the anticipated rate-cutting cycle.

While most experts expect the RBI to initiate an easing phase, views on its extent vary. Taimur Baig of DBS suggests the easing may be modest, while Sajjid Chinoy of JPMorgan Chase & Co. believes the central bank could implement gradual quarter-point cuts—provided global financial conditions remain stable.

Chinoy pointed out that with economic growth at a four-year low and inflation projected to hover around 4.5% in the next fiscal year, the RBI may be more inclined to ease rates.

“With the economy showing significant slack and growth falling below the RBI’s expectations, conditions are favorable for a notable monetary policy adjustment,” he explained.

Additionally, a shift in policy stance from “neutral” to “accommodative” could accompany a rate reduction, according to Aastha Gudwani, India’s chief economist at Barclays Plc. The RBI last altered its stance to neutral in its October policy review.

Rupee Volatility

Malhotra’s statements regarding the rupee will be scrutinized to gauge whether he supports a more flexible exchange rate policy.

Under Das, the RBI actively intervened to maintain a stable trading range for the rupee, amassing over $700 billion in foreign exchange reserves—the fourth largest globally. This intervention contributed to the perception that the rupee was overvalued relative to other currencies. Since Malhotra’s appointment, however, the rupee has become more volatile, depreciating by over 3% against the U.S. dollar in the past two months.

Despite this, Malhotra is expected to uphold the RBI’s general policy of intervening only to smooth excessive volatility rather than targeting a specific exchange rate.

On Thursday, the rupee reached a new low of 87.55 per U.S. dollar, while the 10-year bond yield dropped by one basis point to 6.66%. Most experts believe currency depreciation will not deter the RBI from reducing interest rates.

Although a 5% rupee depreciation typically increases inflation by approximately 0.35 percentage points, many manufacturers and oil producers may absorb the costs due to weak economic demand, according to Radhika Rao of DBS Group Holdings Ltd.

Bonds and Liquidity

Market expectations for a rate cut have solidified, particularly after the central bank injected nearly $18 billion in liquidity last month.

Despite this, traders argue that additional liquidity measures are necessary to ease the banking sector’s cash shortage. In the past month, the liquidity deficit in India’s banking system soared to over 3.3 trillion rupees ($37.9 billion)—the highest in more than a decade—due to the RBI’s forex interventions and tax outflows. Although subsequent liquidity injections have reduced the shortfall to 600 billion rupees, concerns persist.

“While the RBI has taken steps to address liquidity shortages, further action is required,” said Suyash Choudhary, head of fixed income at Bandhan AMC Ltd. “If the objective is to ensure that any rate cuts effectively translate into lower lending rates, more liquidity support will be necessary.”

Source: Bloomberg