Rate Reduction Supports Consumption-Boosting Budget, Paves Way for Potential April Cut
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Synopsis
The RBI's recent 25bps rate cut is expected to enhance consumption-driven strategies in the Union Budget 2025-26, stimulating domestic demand. This strategic move indicates a balanced approach to economic growth and financial stability, setting the stage for possible further cuts in April.
Key Takeaways
- 25bps rate cut by RBI complements Union Budget 2025-26.
- Focus remains on inflation while supporting growth.
- Liquidity measures facilitate effective transmission.
- GDP growth projected at 6.7%.
- Future rate cuts anticipated based on domestic inflation trends.
New Delhi, Feb 7 (NationPress) The 25bps reduction in rates by the Reserve Bank of India (RBI) is expected to enhance the consumption-oriented initiatives detailed in the Union Budget 2025-26, thereby stimulating domestic demand, industry experts stated on Friday.
As per RBI Governor Sanjay Malhotra, the Monetary Policy Committee (MPC) has reached a unanimous agreement to maintain a neutral stance, prioritizing inflation while promoting growth.
“This strategic approach by the Central Bank signifies a meticulous equilibrium between encouraging economic expansion and ensuring financial stability,” remarked Chandrajit Banerjee, Director General of CII.
Crucially, the recent series of liquidity easing initiatives launched in the past fortnight will facilitate the effective transmission of the rate cut to productive sectors of the economy.
Moreover, the RBI's commitment to inject liquidity as required to tackle any frictional or persistent liquidity issues will ensure that monetary policy transmission remains impactful, added Banerjee.
According to Lakshmanan V, Group President and Head-Treasury at Federal Bank, the MPC's decisions on rate cuts, stance, and liquidity measures were largely anticipated.
“This decision is a logical continuation of the liquidity strategies implemented in January, coupled with clear commitments from the RBI to maintain liquidity support whenever necessary. Today’s resolution lays the groundwork for potential rate cuts in April, unless inflation and global economic conditions disrupt trends,” Lakshmanan noted.
The choice to decrease the policy rate occurs against a backdrop of diminishing growth momentum, rising external challenges, and a deceleration in inflationary pressures.
“The GDP growth forecast for the coming year is anticipated at 6.7 percent, aligning with our expectations. On liquidity, the governor has assured proactive measures to maintain favorable liquidity conditions,” mentioned Rajani Sinha, Chief Economist at CareEdge Ratings.
With the Donald Trump Administration in the US influencing global markets, we foresee the RBI being proactive in utilizing liquidity and forex management tools.
S&P Global projects a gradual approach from the US Federal Reserve, predicting a mere 25 basis points cut in the first half of 2025, following a total reduction of 100 bps from September to December 2024.
“The actions of the MPC will heavily rely on domestic inflation. We anticipate that healthy kharif and rabi crops will alleviate food inflation, potentially driving CPI inflation down to 4.4 percent in the next fiscal,” stated Dharmakirti Joshi, Chief Economist at Crisil Limited.
“We predict the MPC will implement another 75-100 bps reduction in the policy rate next fiscal,” he added.
