What it means for the economy?

The Reserve Bank of India (RBI) is on the verge of cutting interest rates for the first time in almost five years as it is due to announce this on February 7. In its first meet under newly appointed Governor Sanjay Malhotra, the Monetary Policy Committee (MPC) is expected to cut the repo rate by 25 basis points (bps) from 6.5% to 6.25%.

Why a Rate Cut Now?

Despite inflation remaining above the RBI’s 4% target, economic sluggishness and liquidity-boosting measures are key drivers behind the anticipated rate cut. The government’s recent liquidity infusion—Rs 1.5 lakh crore in January following Rs 1.16 lakh crore in December—signals an urgent need to support economic growth. Additionally, a $5 billion dollar-rupee swap auction is in place to address liquidity concerns.

Impact on Growth and Consumption

The cost of borrowing will reduce. Consumers and business investment will improve, given recent income tax relief to taxpayers with incomes up to Rs 12 lakh. All these can considerably raise consumption demand. "Now that food inflation has softened, the headline number for CPI should decline to 4.5% in January, which means the central bank may go in for a rate cut," observes Gaura Sengupta, Chief Economist at IDFC First Bank.

Experts forecast additional rate cuts of 50-75 bps in 2025, though global factors could affect India's monetary policy. The rupee has depreciated by 3% since November to 86.6 per dollar, which has prompted the RBI to intervene and created questions over the stability of liquidity. Another uncertainty factor is the US interest rate decision.

Change in Monetary Policy Position

The MPC kept the repo rate almost for two years, changing its stance from 'Withdrawal of accommodation' to 'Neutral' in October 2024. This reflects openness to changes, making this rate cut a strategic pivot towards a more growth-oriented policy.

If the RBI goes ahead with the expected rate cut, this could be a new phase of India's economic strategy, in which growth would be the guiding principle, though inflation and liquidity would be taken care of with caution. Yet, global economic shifts will still be the factor that will dominate future monetary policy decisions.