SBI Research Predicts RBI Repo Rate Cut in February 2025 Policy Review
The Reserve Bank of India (RBI) is anticipated to lower the repo rate by February 2025, according to a recent report by SBI Research. This potential cut, estimated to total 75 basis points cumulatively, is projected to be unaffected by the rupee’s depreciation against the US dollar, mirroring RBI’s decision-making stance during a similar situation in 2018.
Unanimity Eludes MPC
In its latest monetary policy review, the RBI maintained the repo rate at 6.5% for the 11th consecutive time. However, the decision was not unanimous. Two newly appointed members of the Monetary Policy Committee (MPC) voted for a 25-basis-point reduction. The committee, nonetheless, upheld its neutral policy stance, with a clear focus on aligning inflation with its target while simultaneously supporting economic growth.
Inflation Projections Adjusted Upwards
The RBI revised its inflation forecast for 2024-25, increasing it by 30 basis points to 4.8%, reflecting the recent upward trend in retail inflation. October’s retail inflation stood at 6.21%, breaching the central bank’s upper tolerance limit of 6%. This surge was largely attributed to rising food prices, particularly vegetables, fruits, and oils.
SBI Research highlighted that the inflation outlook will depend heavily on food price trends. While softening vegetable prices may provide relief, adverse weather conditions and international agricultural price hikes could pose risks.
GDP Growth Forecast Downgraded
The RBI has also lowered its GDP growth projection for 2024-25 from 7.2% to 6.6%. This marks the first time in five years that growth estimates were initially revised upwards (to 7.2%) and subsequently downgraded. SBI Research predicts an even lower growth rate of 6.3%, indicating further challenges to achieving robust economic performance.
The report noted that such downward revisions are not unprecedented. On average, growth forecasts for 2021-22 and 2022-23 were downgraded by 90 basis points, reflecting the inherent challenges in forecasting amid dynamic economic conditions.
Implications for Policy and Markets
The anticipated rate cut reflects a shift in policy focus toward supporting growth amid global and domestic uncertainties. This move is expected to alleviate borrowing costs and stimulate economic activity. Markets, however, have reacted with caution, reflecting concerns over growth and inflation trends.
The inflation trajectory and GDP forecasts for the coming months will significantly influence the central bank’s decision-making. Food inflation, international economic conditions, and domestic fiscal strategies will remain critical factors shaping monetary policy.
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