As India’s economy navigates a critical phase post-Budget 2025, all eyes are on the Reserve Bank of India’s (RBI) upcoming Monetary Policy Committee (MPC) meeting on February 7. Market experts widely expect a 25-basis-point (bps) cut in the repo rate, citing the government’s growth-focused policies and easing inflation concerns.
Madan Sabnavis, Chief Economist at Bank of Baroda, believes that macroeconomic conditions are ripe for a rate cut. “Conditions appear to support view of rate cut especially after budget has given growth stimulus. There are expectations that inflation will come down and comfort may be taken here even though latest inflation number above 5%. The only concern now could be trade war outcomes as rupee under pressure again,” he said.
The case for monetary easing is strengthened by recent fiscal measures. Edelweiss Mutual Fund notes that monetary policy will play a crucial role in supporting economic growth. “Monetary policy will have to do heavy lifting to support the economic growth. As a result, the odds of a 25-bp rate cut in February MPC has increased significantly. We expect at least 50 basis points cut in Repo Rate in the first half of CY2025,” the fund house stated.
Murthy Nagarajan, Head-Fixed Income at Tata Asset Management, also expects a shift in policy stance. “The government has done its bit to stimulate demand. CPI inflation for the current quarter is expected to be 4.7 percent, and one-year-ahead inflation, as per RBI projections, is 3.8 percent. The RBI is injecting liquidity through OMO purchases of government securities, buy-sell swaps in dollars, long-term repo auctions, and buying on the NDS-OM screen. Given CPI inflation coming within its range of 4 to 5 percent and GDP growth being weak, the RBI is expected to cut rates by 50 to 75 basis points along with adding liquidity to the system. This is expected to start with a rate cut of 25 basis points in the coming monetary policy on 7th February 2025,” he explained.
The fiscal backdrop also plays a role in shaping expectations. The Budget 2025 adhered to the fiscal consolidation roadmap, with a fiscal deficit target of 4.4%—lower than the earlier 4.5% target for FY26. However, government borrowings remain on the higher side, with net borrowing at Rs 11.54 lakh crore and gross borrowing at Rs 14.82 lakh crore. This is largely due to reduced reliance on small savings, which fell to Rs 3.43 lakh crore from the budgeted Rs 4.11 lakh crore in FY25, according to Nagarajan.
The government’s push to boost consumption has also added to expectations of a rate cut. “The government is trying to kick-start the economy by increasing consumption. The government has reduced income tax rates and given a bonanza of Rs 1 lakh crore to tax-paying investors. This could be used by taxpayers for consumption or repayment of their loans. The government has kept its capital expenditure at Rs 11.20 lakh crores and focused more on public-private partnerships to increase capital expenditure in the economy. Most of the low-hanging investment in roads, railways, and defense has been done. For further progress, it requires state governments to improve governance and implement reforms at the state level,” said Nagarajan.
However, not all experts are convinced that a rate cut is imminent. Rumki Majumdar, Economist and Director at Deloitte, believes the RBI will adopt a cautious stance. “Given the balancing act of managing inflation and boosting credit growth, it will be a difficult call. The RBI is under pressure to cut policy rates. But we believe the RBI will likely maintain status quo in terms of policy rates and maintain easy stance,” she noted.
Umeshkumar Mehta, CIO, SAMCO Mutual Fund agrees, “The bond market interest rates in the world’s largest economy are steadily rising primarily driven by heightened inflation expectations due to tariffs. Given these macroeconomic factors and the continuous appreciation of the U.S. dollar, the Indian Rupee faces increasing depreciation pressures. This scenario strengthens the argument that our MPC is likely to maintain the current interest rates rather than implement a rate cut at this time to keep currency stable.”
With diverging views on the timing and extent of rate cuts, the February MPC meeting will be crucial in setting the tone for the first half of 2025. While economic stimulus from the Budget and easing inflation may justify a cut, global uncertainties and currency pressures could temper the RBI’s approach. For now, the market watches and waits.