Is RBI poised to cut repo rate for first time in five years under new Governor Sanjay Malhotra?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is expected to cut the repo rate for the first time in nearly five years in its upcoming meeting scheduled from February 5 to 7. This would mark the first policy meeting under newly appointed Governor Sanjay Malhotra. If implemented, this cut would come after two years of maintaining a steady rate. Market experts see RBI delivering a 25 bps rate cut and believe the decision will be influenced by the government’s growth-oriented policies and easing inflation concerns.

Policy Shift Amid Economic Considerations

The anticipated rate cut follows a Union Budget announcement that surprised many by offering income tax relief of up to ₹12 lakh. Analysts widely expect the RBI to maintain a neutral stance in its monetary policy, signalling a cautious approach toward managing inflation and growth.

SBI Research Predicts Multiple Rate Cuts

According to an SBI Research report, the RBI is expected to lower its policy rate by a cumulative 75 bps over the easing cycle, beginning with a 25-bps cut in February. The report projects another rate cut in April 2025, followed by a potential pause in June, with a second round of rate reductions starting in October 2025. Despite an upward inflation trajectory, SBI Research estimates inflation will ease to 4.5 per cent in Q4 FY25 and average 4.8 per cent for the full year.

Expert Opinions on the Rate Cut Impact

Suresh Darak, Founder of Bondbazaar, anticipates a 25-bps rate cut in the upcoming policy but believes it is already factored into market expectations. He emphasised that the RBI’s future guidance, particularly regarding liquidity management amid currency depreciation, will be the key focus for markets.

Vikas Gupta, Smallcase Manager & Founder of OmniScience Capital, said the RBI faces a challenge in cutting rates given the depreciation of the rupee, which may prompt alternative measures to boost market liquidity. However, he reaffirmed market expectations of a 25-bps rate cut this week.

Abhishek Pandya, Research Analyst at StoxBox, expects a 25-bps rate cut and additional measures to enhance liquidity. 

“Recent steps taken by the RBI, such as an Open Market Operation worth ₹60,000 crore and a 56-day Variable Rate Reverse Repo of ₹50,000 crore, have been aimed at sustaining liquidity. Furthermore, the budget’s tax relief for individual taxpayers is expected to drive urban consumption, which had remained weak in recent quarters. With CPI inflation declining from 6.2 per cent in October 2024 to 5.2 per cent in December 2024, Governor Malhotra’s insights on inflation and GDP projections will be crucial,” Pandya said.

Rate Trajectory and Policy Evolution

The central bank has maintained the policy repo rate at 6.5 per cent since April 2023, following a cumulative increase of 250 bps between May 2022 and February 2023 to curb inflation. During the December 2024 MPC meeting, the central bank left the repo rate unchanged for the 11th consecutive time but shifted its stance from ‘Withdrawal of accommodation’ to ‘Neutral.’ This indicated a willingness to reconsider its monetary approach, though no immediate rate cut was signalled at that time.

As the February MPC meeting unfolds, the market will closely monitor Governor Malhotra’s stance on future rate cuts and liquidity measures. A rate cut at this juncture could set the tone for sustained economic growth while ensuring inflation remains within manageable levels throughout FY26.

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