In a significant move that aligns with the Union Budget’s goals to stimulate economic activity and maintain fiscal prudence, the Reserve Bank of India (RBI) is anticipated to cut the repo rate by 25 basis points for the first time in nearly five years, industry experts revealed on Wednesday.
The last repo rate reduction occurred in May 2020, when the central bank slashed it by 40 basis points to 4 percent to alleviate the economic impact of the Covid-19 pandemic. Currently, the repo rate stands at 6.50 percent.
Given the Union Budget’s focus on reviving consumption to bolster economic growth, the RBI may consider turning the policy rate cycle. Shishir Baijal, Chairman and Managing Director of Knight Frank India, noted that the government’s balanced borrowing plan and efforts to enhance liquidity create a favorable environment for such a rate cut.
A potential rate cut could benefit the real estate sector by making borrowings more affordable for homebuyers and boosting consumer sentiment, particularly in the lower and mid-income segments. Additionally, increased liquidity in the banking system would facilitate easier access to financing for developers’ projects.
Bajaj Broking Research highlighted that the potential rate cut follows a period of stability, as the domestic rate-setting panel has kept the policy repo rate unchanged for the past 11 consecutive meetings. This comes after a series of rate hikes totaling 250 basis points between May 2022 and February 2023.
The Union Budget’s emphasis on consumption and fiscal discipline leaves room for the central bank to stimulate growth. With GDP growth slowing to a seven-quarter low of 5.4 percent in Q2 FY25, a rate cut appears imminent, according to the report.
RBI’s recent liquidity measures aim to stabilize the financial system, reinforcing expectations of monetary easing. The central bank’s Monetary Policy Committee (MPC) shifted to a neutral stance in October last year, providing flexibility in policy decisions. Economists predict no change in this stance in February, with a shallow rate cut cycle anticipated.
“While the RBI ensures sufficient liquidity, a CRR cut is unlikely in the next policy announcement, as the central bank maintains a supportive financial environment,” the report mentioned.
