RBI may cut repo rate by 25 BPS this week to stimulate growth

Growth-inflation dynamics show improvement as RBI considers its first rate cut in two years

The Reserve Bank of India (RBI) is expected to reduce the key interest rate by 25 basis points this week, marking its first rate cut in nearly two years. This move comes as part of efforts to stimulate growth, complementing the Union Budget's focus on boosting consumption-led demand, although the weakening rupee remains a concern.

Since February 2023, the RBI has kept the repo rate at 6.5%, its short-term lending rate. The last reduction occurred during the COVID-19 pandemic in May 2020, followed by a series of rate hikes to control inflation. With retail inflation largely staying below the RBI's 6% comfort level for most of the year, experts believe the central bank now has the room to shift its focus toward reviving economic growth, which has been slowed by weak consumption.

RBI Governor Sanjay Malhotra will chair his first Monetary Policy Committee (MPC) meeting, which is set to begin on Wednesday, with the decision to be announced on Friday, February 7.

Madan Sabnavis, Chief Economist at Bank of Baroda, indicated a high likelihood of a rate cut, citing two reasons. First, the RBI’s recent liquidity enhancement measures have improved market conditions, creating a favorable environment for rate adjustments. Second, the Union Budget’s emphasis on boosting consumption presents a timely backdrop for such a move. On January 27, the RBI infused ₹1.5 lakh crore into the banking system, signaling that a rate cut may be on the horizon. Sabnavis also noted that the RBI might revise its growth forecast, which is currently pegged at 6.4% by the National Statistical Office (NSO). While growth projections for FY26 are usually released in April, any updates could come sooner.

Aditi Nayar, Chief Economist at ICRA, agreed that the growth-inflation dynamics have improved since the December 2025 policy review, and she believes the balance is now tilted toward a rate cut. However, she cautioned that global factors, such as a sharp depreciation of the rupee against the US dollar, could delay the rate cut until April 2025. The rupee recently hit an all-time low of 87.17 per dollar, raising concerns about potential currency volatility.

The Union Budget, presented on Saturday, announced significant income tax concessions aimed at stimulating middle-class consumption. Together with a potential rate cut, these measures could provide a much-needed boost to domestic demand.