New Delhi, February 6
The Reserve Bank of India (RBI) is expected to reduce the repo rate by 25 basis points (bps) in its upcoming monetary policy announcement on February 7, according to a report by Bank of Baroda.
The report suggested that inflation, which remains the primary focus of monetary policy, is showing signs of moderation, allowing the RBI to consider a rate cut.
It said, "balancing and counterbalancing all macro and geopolitical factors, we believe there remains space for 25bps rate cut by RBI in the upcoming policy."
The report highlighted that inflationary pressures have eased, mainly due to a decline in the prices of essential vegetables such as tomatoes, onions, and potatoes. The improved supply of these items has contributed to lower price volatility in the Consumer Price Index (CPI).
This provides the RBI with some flexibility to begin reducing interest rates, although the process is expected to be gradual and dependent on further economic data.
Since the last monetary policy meeting, several global and domestic factors have influenced financial markets. One of the major developments has been the increased volatility in asset markets, particularly affecting the Indian rupee.
The report attributed this volatility to rising geopolitical tensions and concerns over trade policies, especially the possibility of tariffs and counter-tariffs imposed by major economies such as the United States, Canada, Mexico, and China. The strengthening of the US dollar due to these tensions has impacted global currencies, including the rupee.
The tightening of domestic liquidity conditions has also been observed, with banks facing pressure due to slower deposit growth. While credit growth is stabilizing, liquidity constraints in the banking sector have become evident.
Additionally, domestic economic growth remains uneven, with premium-priced goods continuing to drive consumption trends.
Corporate financial results for the third quarter of the fiscal year reflect a slowdown in sales, signaling a challenging environment for businesses. This trend is likely to be visible in the Gross Value Added (GVA) of the manufacturing sector as well.
Given these economic conditions, the report noted that RBI may opt for a moderate rate cut, balancing the need to support growth while maintaining financial stability.
The report suggested that the central bank's approach will remain cautious and data-driven in the future.
- ANI