RBI Set to Cut Repo Rate Amid Cooling Inflation Pressures

The Reserve Bank of India is expected to lower the repo rate by 25 basis points due to moderating inflation, according to a Bank of Baroda report. The easing of price pressures, particularly in key vegetables, offers RBI some leeway to reduce rates, although the move will be gradual and data-driven.

The Reserve Bank of India (RBI) is poised to cut the repo rate by 25 basis points in its forthcoming monetary policy statement on February 7, as forecasted by a Bank of Baroda report. Highlighting inflation as the central focus, the report indicates signs of moderation, potentially paving the way for a rate reduction.

"Considering macro and geopolitical variables, there is room for the RBI to apply a 25bps rate cut," the report states. Key contributors to eased inflationary pressures include falling prices of vital vegetables like tomatoes, onions, and potatoes, reducing Consumer Price Index (CPI) volatility.

This scenario allows the RBI flexibility for incremental interest rate cuts, though such actions will hinge on ongoing economic evaluations. Post the last monetary policy meeting, various global and local events have swayed financial markets, notably heightening asset market volatility, impacting the Indian rupee.

The report attributes this volatility to escalating geopolitical tensions and international trade policy uncertainties, emphasizing potential tariff conflicts involving major players such as the U.S., Canada, Mexico, and China. A stronger US dollar under these tensions has affected global currencies, including the rupee, with domestic liquidity pressures due to slower deposit growth further complicating the situation.

The domestic economy displays uneven growth, with high-end product consumption still driving trends. Third-quarter corporate financials reflect slow sales growth, indicating tough business conditions, likely reflected in the Gross Value Added (GVA) figures of the manufacturing sector.

Given the economic landscape, the report suggests the RBI may favor a measured rate cut to foster growth while securing financial stability, maintaining a cautious, data-backed approach moving forward. (ANI)

(With inputs from agencies.)