RBI Likely to Cut Interest Rates to 6.25 pc in February, Another Cut Expected Next Quarter
RBI Likely to Cut Interest Rates to 6.25 pc in February, Another Cut Expected Next Quarter
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NEW DELHI:Union Finance Minister Nirmala Sitharaman will present the Union Budget for 2025-26 on Saturday, February 1, at 11 AM in Parliament. This will be her eighth budget in a row, and many taxpayers and experts are eagerly waiting to see if there will be significant changes in income tax.

People are hoping for major updates, such as revised tax slabs under the new tax system, more benefits in the old regime, and higher exemptions and deductions. There is also a demand to allow deductions for voluntary contributions to NPS under the new regime, as well as increased tax relief for health and life insurance premiums and home loan repayments.

In line with Budget focus, the Reserve Bank of India (RBI) is expected to lower its key interest rate to 6.25 percent on February 7, followed by another cut in the next quarter, according to a Reuters poll of economists. Their predictions remain mostly unchanged from last month.

This outlook comes despite India’s economic growth slowing to 5.4 percent in the July-September quarter, significantly lower than the 8.2 percent recorded in the previous fiscal year.

The government’s budget on February 1 is not expected to increase infrastructure spending, which has been a major driver of growth in recent years. As a result, the responsibility of boosting the $4 trillion economy largely falls on the RBI. The central bank has recently injected large amounts of liquidity into the banking system, which many economists see as a signal that a rate cut is coming—despite inflation remaining relatively high.

Poll Results and Market Expectations
A poll conducted between January 22 and 30 showed that 45 out of 62 economists expect the RBI to cut the repo rate by 25 basis points to 6.25 percent at the conclusion of its February 5-7 meeting. This will be the first meeting chaired by the new RBI Governor, Sanjay Malhotra, who took over late last year.

If the rate cut happens, it will be the first in more than four years, dating back to the early days of the COVID-19 pandemic.

"The new governor seems more focused on supporting economic growth rather than strictly controlling inflation, unlike his predecessor," said Kunal Kundu, an economist at Societe Generale.

However, he added that a rate cut alone may not be enough to revive economic activity. "For real recovery, both monetary and fiscal policies need to work together," he explained.

Seventeen economists in the poll believe the RBI will keep rates unchanged at 6.50 percent, citing concerns over persistent inflation. While most expect another rate cut to 6.00 percent next quarter, there is no clear consensus on when exactly it will happen.

Challenges: Slower Growth and Inflation Worries

India’s economy is expected to grow by 6.4 percent this fiscal year, with slight improvements to 6.5 percent and 6.6 percent over the next two years. However, no economist in the poll expects growth to reach 8 percent, which is often seen as the necessary rate for creating enough high-paying jobs in the country.

Meanwhile, inflation has stayed above the RBI’s medium-term target of 4 percent for most of the past year. The Indian rupee has also weakened despite the central bank selling tens of billions of dollars in reserves to stabilize it.

According to the poll, inflation is unlikely to drop to the RBI’s target range of 2-6 percent before the middle of next year. A sharp rate cut could further weaken the rupee and drive up inflation through higher import costs.

 

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