RBI policy: Why is the MPC likely to cut the repo rate?

What is expected from the RBI’s upcoming monetary policy?

A bulk of economists person pencilled successful a 25 ground points (bps) simplification successful the repo rate, to 6.25 per cent from 6.5 per cent. One ground constituent (bps) is one-hundredth of a percent point. This would beryllium the archetypal monetary argumentation announcement by the caller RBI Governor, Sanjay Malhotra.

“We bash judge that a repo complaint chopped is connected the cards soon, arsenic the budget has done good to spur growth. And with expectations of inflation to travel down, this could beryllium the close time,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

The Union Budget 2025-26 announced a chopped successful idiosyncratic income taxation and besides revised the limits of the taxation deducted astatine root (TDS). These measures would supply the much-needed stimulus to depletion demand.

Retail ostentation oregon user terms scale (CPI) ostentation eased to a four-month debased of 5.22 per cent successful December from 5.48 per cent successful the erstwhile month.

“We expect a 25-basis constituent complaint chopped successful the February 2025 policy. Cumulative complaint cuts implicit the rhythm could beryllium astatine slightest 75 ground points, with 2 successive complaint cuts implicit February and April 2025,” said an economical study by State Bank of India (SBI).

With an intervening spread successful June 2025, the 2nd circular of complaint cuts could commencement from October 2025, the study said.

Sabnavis said the RBI has already announced liquidity enhancement measures that person improved conditions successful the market. This appeared to beryllium a prerequisite for cutting rates.

Last week, the RBI had announced 3 measures — $5 cardinal forex swap, Rs 60,000 crore of unfastened marketplace operations, and Rs 50,000 crore worthy of 56-day adaptable time repo complaint — to amended liquidity successful the banking system.

Global commercialized wars impact

The argumentation volition beryllium announced amid planetary uncertainty, with US President Donald Trump announcing tariffs connected Canada, Mexico and China. The tariffs connected Canada and Mexico person been postponed for a month.

The tariffs triggered a fearfulness of planetary commercialized wars, resulting successful a emergence successful the dollar against large currencies connected Monday. The rupee plunged beneath the 87-level to an all-time debased of 87.29 per dollar connected Monday.

“The puzzle is to negociate rupee movements with liquidity due to the fact that if dollars are sold, it volition gully retired liquidity. All eyes are connected the RBI present for monetary action,” Sabnavis said.

What happens to lending rates if the repo complaint is cut?

If RBI reduces the repo complaint to 6.25 per cent from the existing 6.5 per cent, each outer benchmark lending rates (EBLR) linked to the repo complaint volition travel down by 25 bps, giving alleviation to borrowers arsenic their equated monthly instalments (EMIs) volition fall.

Lenders whitethorn besides trim involvement rates connected loans that are linked to the marginal outgo of fund-based lending complaint (MCLR), wherever the afloat transmission of a 250 bps hike successful the repo complaint betwixt May 2022 and February 2023 has not happened.

In effect to the 250 bps hike successful the argumentation repo complaint since May 2022, banks person revised upwards their repo-linked outer benchmark-based lending rates (EBLRs) by a akin magnitude. The one-year median marginal outgo of funds-based lending complaint (MCLR) has accrued by 175 bps during May 2022 to December 2024.

GDP maturation forecast

Bank of Baroda’s Sabnavis expects immoderate changes successful the forecast connected growth, arsenic the National Statistics Office (NSO) had projected 6.4 per cent for the year.

“It would beryllium absorbing to spot if RBI would supply a forecast for maturation successful FY26, though this usually is published successful the April policy,” helium said.

In the December 2024 monetary policy, the RBI had slashed the GDP maturation estimation to 6.6 per cent for FY2025, from an earlier projection of 7.2 per cent.