RBI MPC: ‘RBI may cut repo rate by 25 bps, Bank of Baroda report explains reason for claim
New Delhi| The Reserve Bank of India (RBI) may announce a repo rate cut of 25 basis points (bps) for the first time after a gap of five years during the monetary policy announcement on February 7. This has been said in a report of Bank of Baroda. The three-day meeting of the Monetary Policy Committee (MPC) is currently going on. New RBI Governor Sanjay Malhotra will announce the MPC’s decision for the first time on Friday. According to the report, inflation, the focus of which is central to monetary policy, shows signs of moderation, so the central bank has an opportunity to cut rates.
“Balancing all macro and geopolitical factors, we believe there remains room for a rate cut of 25 basis points by the RBI in the upcoming policy”, the report said RBI last cut policy interest rates in May 2020 during Covid. Then the repo rate was reduced to four percent. The rateo was then increased seven times, increasing it to 6.5%. There has been no change in the repo rate after February 2023.
According to the report of Bank of Baroda, inflationary pressure has reduced. Mainly the prices of essential vegetables like tomatoes, onions and potatoes have fallen. The improved supply of these commodities has contributed to reducing price volatility in the Consumer Price Index (CPI). This provides some flexibility to the RBI to start cutting interest rates, although this process is expected to happen gradually and is dependent on further economic data. Since the last monetary policy meeting, several global and domestic factors have affected financial markets. This is increasing volatility in asset markets, which has impacted the Indian rupee.
The report blames rising geopolitical tensions and trade policy concerns for volatility in global trade. Fears of tariffs and counter-tariffs, especially from major economies like the US, Canada, Mexico and China, have weighed on the global market. Due to these tensions, the strengthening of the dollar has affected major global currencies including the rupee.
“Domestic liquidity conditions have also seen tightening, with banks facing pressure due to slow deposit growth”, the Bank of Baroda report said. While credit growth is stabilizing, liquidity shortages in the banking sector have become apparent. Moreover, domestic economic growth remains uneven, with premium-priced goods driving consumption trends” The financial results of companies in the third quarter of the financial year reflect a slowdown in sales, which is indicating a challenge for businesses. This trend is also expected to be reflected in the gross value added (GVA) of the manufacturing sector.
Looking at the current economic conditions, the report said the RBI may cut interest rates while maintaining financial stability and balancing the need to support growth. The report suggests that the central bank’s approach in the future will be cautious and based on data.
