RBI Expected to Cut Interest Rates as Inflation Eases
The Reserve Bank of India is expected to cut interest rates for the first time in over four years to stimulate the economy as inflation eases. A reduction to 6.25% is anticipated.
The newly appointed Reserve Bank of India (RBI) governor Sanjay Malhotra leaves after addressing a press conference, in Mumbai on December 11, 2024.
India's central bank will likely cut benchmark interest rates in its policy meeting that's underway, as easing inflation offers it room to stimulate a faltering economy, though the rupee hovers at record lows.
The Reserve Bank of India is poised to trim the repo rate by 25 basis points to 6.25% as it concludes its policy meeting on Friday, setting off "a shallow rate cut cycle," said Taimur Baig, chief economist at DBS Bank.
Indian bonds have rallied in recent weeks with the 10-year benchmark yield falling by 16.5 basis points in about three weeks to 6.664 as of Wednesday close, according to LSEG data, as traders ramp up wagers for an interest rate cut at the February meeting.
If the RBI does lower rates, it will be the first cut in more than four years. The central bank last reduced rates in May 2020 as the country battled the Covid-19 pandemic-inflicted downturn.
Investors will also scrutinize the statement of the new RBI Governor Sanjay Malhotra to assess the direction of the bank's monetary policy. Malhotra took charge in December.
"It will be interesting to see if the RBI continues with the governor's statement, apart from the monetary policy statement, as a tool of policy communication," Goldman Sachs said.
The Wall Street bank anticipates a quarter-percentage cut this week, along with a monetary policy shift to looser "accommodative" stance from "neutral." It also penciled in an additional 25-basis-point cut in April.
The benchmark repo rate has remained steady at 6.5% for the past two years, as the domestic inflation rate has stayed above the central bank's medium-term target of 4%, and even breached the RBI's upper tolerance limit of 6% in October.
"The delay in implementation of universal tariffs by the incoming U.S. administration provides some tactical space for RBI to prioritize domestic growth ... and space to cut policy rates," said Ruhul Bajoria, an economist at Bank of America in India.
