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'As the Budget has taken some measures to spur growth, similar action from the MPC may be expected.'
Taking into account the moderating inflation, slowing down of economic growth rate and global indicators the Reserve Bank of India's six member Monetary Policy Committee (MPC) may cut the repo rate by 25 basis points, to give a push, said top economists.
Simply put, repo rate is the rate at which the RBI lends to the banks. Currently the repo rate is 6.50%.
The MPC meeting between February 5 and 7 may revise downwards India's expected growth rate at 6.4% from its earlier 6.6% projection in line with the First Advance Estimates (FAE) and the inflation projection from 4.5% to 4.8%.
This will be the first MPC meeting chaired by RBI's new Governor Sanjay Malhotra.
"There is a high probability of lowering the repo rate this time," says Madan Sabnavis, Chief Economist, Bank of Baroda.
"First, the liquidity induction measures announced are witnessing the desired results. Second, the Budget has given a push to growth and hence based on the judgments of the MPC members on future inflation, there can be a strong case of cut in rates," explains Sabnavis.
"As the Budget has taken some measures to spur growth, similar action from the MPC may be expected," Sabnavis adds.
'The First Advance Estimate (FAE) projects GDP (gross domestic product) growth to slow to 6.4% in FY25 compared to 8.2% growth recorded in FY24,' Credit rating agency CARE Ratings noted.
'Investment growth has been decelerating, and high-frequency indicators suggest a moderation in urban consumption demand.
'Corporate performance has been lacklustre, with profitability contracting in the H1 FY25 and early Q3 FY25 results showing a mixed outlook. Furthermore, the global environment remains vulnerable due to ongoing geopolitical tensions and policy ambiguities following the US elections.
'However, on the positive side, domestic inflationary pressures have moderated in recent months, driven by a fall in food prices. Healthy Kharif production and good progress of rabi sowing brightens the outlook on food inflation going ahead,' CARE Ratings said.
Amidst these macroeconomic conditions, the MPC's focus is expected to shift from concerns over high inflation to supporting economic growth.
'Therefore, we anticipate that the MPC will reduce the policy rate by 25 bps in the upcoming meeting while retaining a neutral stance,' CARE Ratings said.
According to the credit rating agency, the RBI's policy statement is likely to focus on liquidity management as liquidity conditions have remained tight with money market rates remaining elevated.
Strong FII outflows and the RBI's intervention to cushion the impact on exchange rate have resulted in a fall in durable liquidity.
At the December 2024 MPC meeting two members wanting the repo rate to be cut by 25 basis points voted against the decision to retain the repo rate at 6.5%.
Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com
Feature Presentation: Rajesh Alva/Rediff.com