Mumbai, Feb 3 (PTI) – 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 is anticipated to complement the Union Budget’s efforts to stimulate consumption-driven demand. However, the weakening rupee continues to pose a challenge.
Experts suggest that with retail inflation remaining within the central bank’s comfort zone—staying under 6% for most of the year—there is room for the RBI to take policy action aimed at reviving growth, which has been impacted by sluggish consumer spending.
Since February 2023, the RBI has maintained the repo rate (short-term lending rate) at 6.5%. The last rate reduction occurred during the COVID-19 pandemic in May 2020, after which it was gradually raised to the current level.
The upcoming Monetary Policy Committee (MPC) meeting, the first under newly appointed RBI Governor Sanjay Malhotra, begins on Wednesday. The panel's decision will be announced on Friday, February 7.
Experts See High Probability of Rate Cut
Madan Sabnavis, Chief Economist at Bank of Baroda, indicated that a rate cut appears likely due to two key factors. "First, the RBI has already implemented liquidity enhancement measures, which have improved market conditions—seemingly a prerequisite for a rate cut," he stated. Additionally, he noted that the Union Budget has provided a fiscal boost, making it an opportune moment for the RBI to lower rates in alignment with these measures.On January 27, the RBI announced an infusion of ₹1.5 lakh crore into the banking system to enhance liquidity, further strengthening the case for a rate cut.
Growth Outlook and Inflationary Impact
Aditi Nayar, Chief Economist and Head of Research at ICRA, observed that the economic landscape has improved since the RBI’s last policy review in December 2025. She emphasized that the fiscal stimulus from the Union Budget is unlikely to significantly impact inflation."Given these conditions, we believe the balance is tilted towards a rate cut in the February 2025 policy review," Nayar said. However, she cautioned that if global factors lead to further depreciation of the Indian rupee against the US dollar this week, the anticipated rate cut might be postponed to April 2025.
Rupee Hits Record Low
The Indian rupee faced a sharp decline on Monday, plummeting 55 paise to close at a historic low of 87.17 against the US dollar. This depreciation raises concerns about external stability, potentially influencing the RBI’s policy decision.Union Budget’s Impact on Demand
The Union Budget, presented in Parliament on Saturday, introduced significant income tax concessions aimed at boosting consumption, particularly among the middle class. This fiscal stimulus is expected to drive demand and support economic growth.With key macroeconomic indicators aligning favorably, all eyes are on the RBI’s decision this Friday, which could set the tone for the monetary policy trajectory in the months ahead.