RBI Poised for Rate Cuts Amid Inflation Challenges and Growth Forecasts

SBI Research anticipates a significant repo rate cut by the RBI in February 2025, undeterred by the rupee's depreciation against the U.S. dollar. Despite keeping rates unchanged recently, RBI's focus remains on aligning inflation with targets and spurring growth, amid fluctuating GDP and inflation forecasts.

The Reserve Bank of India (RBI) is anticipated to reduce its repo rates by a cumulative 75 basis points in February 2025, according to a report from SBI Research. This move, if undertaken, is expected to be independent of the rupee's weakness against the U.S. dollar, reminiscent of the 2018 decision when the RBI refrained from hiking rates despite pressure on the rupee.

On the day RBI announced its monetary policy, it decided to maintain the repo rate at 6.50 percent for the eleventh consecutive time. The decision wasn't unanimous, as two newly inducted committee members advocated for a 25 basis point rate cut. The committee, however, agreed to retain a neutral policy stance, focusing unwaveringly on aligning inflation with targets while bolstering economic growth.

Amidst these decisions, the RBI adjusted its inflation projection for 2024-25 upwards by 30 basis points to 4.8 percent due to recent trends. October's retail inflation surpassed the RBI's upper tolerance threshold, largely driven by rising food prices, indicating that the trajectory of food inflation will significantly influence future rates. Meanwhile, the RBI has significantly downgraded its GDP growth forecast for 2024-25 from 7.2 percent to 6.6 percent, acknowledging potential risks and previous overestimations in growth predictions.

(With inputs from agencies.)