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RBI to cut rates to 6.25% in Feb, followed by one more cut next qtr: Poll

In its Feb 1 budget, the government is not expected to increase infrastructure spending, a main driver of growth in past years, leaving the onus on the RBI to revive the $4 trillion economy

RBI, Reserve Bank of India

It would be the first rate cut in more than four years, since early in the Covid-19 pandemic | (Photo: Reuters)

Reuters BENGALURU

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The Reserve Bank of India (RBI) is set to cut its main policy rate on Feb 7 followed by just one more cut next quarter, according to economists polled by Reuters, who have kept their views largely unchanged from a month ago.

The steady outlook comes despite recent data showing economic growth slowed to an annual 5.4 per cent in the July-September quarter, well below the 8.2 per cent seen in the last fiscal year.

In its Feb 1 budget, the government is not expected to increase infrastructure spending, a main driver of growth in past years, leaving the onus on the RBI to revive the $4 trillion economy.

 

The central bank has injected massive liquidity into the banking system in recent days, which some economists take to mean a rate cut is imminent, despite relatively high inflation.

Over 70 per cent of respondents, 45 of 62, in a Jan. 22-30 poll, forecast the RBI would cut its key repo rate by 25 basis points to 6.25 per cent at the conclusion of its Feb. 5-7 meeting, the first chaired by Governor Sanjay Malhotra, a former civil servant appointed late last year.

It would be the first rate cut in more than four years, since early in the Covid-19 pandemic.

"The new governor's take on growth and currency, unlike his predecessor's, suggests monetary policy is likely to tilt towards supporting growth rather than continuing to be fearful of inflation," said Kunal Kundu, India economist at Societe Generale.

"A rate cut is unlikely to lead to a discernible recovery in economic activity...For that to materialise, there would need to be a coordinated approach between monetary (and) fiscal policies."

Seventeen respondents expected the repo rate to remain at 6.50 per cent, where it has sat for nearly two years, mostly because of above-target inflation.

While poll medians reflected expectations that the RBI would cut rates once more to 6.00 per cent next quarter, there was no majority among economists on when such a move would come.

Slower growth, sticky inflation

Growth in Asia's third-largest economy for the fiscal year ending in March is forecast to average 6.4 per cent, before accelerating to 6.5 per cent and 6.6 per cent in the next two years, respectively.

No one in the poll expected growth to touch 8 per cent, a rate most economists say is required for India to create well-paying jobs in the world's most populous country, at any point in the two-year forecast horizon.

Inflation has stayed above the central bank's medium-term target of 4 per cent for most of the past year. At the same time, the rupee has been steadily weakening, despite substantial intervention from the RBI selling tens of billions of dollars in reserves.

Inflation is not expected to fall to or below the mid-point of the RBI's 2-6 per cent target range until at least the middle of next year, according to poll medians.

The rupee, which fell nearly 3 per cent against the US dollar last year, remains a risk as sharp rate cuts could fuel more inflation through imports.

"The biggest near-term hurdle for the RBI appears to be...the pressure on the exchange rate, reducing the degrees of freedom the RBI has in running an independent monetary policy," wrote Rahul Bajoria, India & ASEAN economist at Bank of America.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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First Published: Jan 31 2025 | 8:58 AM IST

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