RBI Policy: Why is the RBI Monetary Policy Committee (MPC) likely to cut the Repo Rate starting in 2025?

The Reserve Bank of India’s Monetary Policy Committee (MPC) is scheduled to meet from 5 to 7 February 2025 and may announce the first reduction in repurchase rates in five years. The expected 25 basis point cuts (6.50% to 6.25%) are intended to offset slowdowns in GDP growth (5.4% in Q2FY25), alleviate inflation (forecast 4.4%) and global economic uncertainty. Markets expect fiscal policy measures and liquidity injections to support this move, with economists predicting further cuts in 2025. This decision will affect loan EMI, investment and economic recovery, but the depreciation of the rupee and inflation trends remain major issues.

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is scheduled to meet from February 5 to July 7, 2025. The meeting is expected to mark the first cut in repurchase rates in nearly five years, reflecting the central bank’s shift to support economic growth. Due to a variety of economic and financial factors, the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) is expected to lower the repurchase rate in 2025. These include slowing economic growth, easing inflation, global economic conditions, fiscal policy direction and market expectations.

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Key details	information
Meeting date	February 5-7, 2025
Expected repo rate to decrease	25 basis points (BP) (from 6.50% to 6.25%)
RBI Governor	Sanjay Malhotra (from December 2024)
See more : Optical Illusion Visual Test: If you have Eagle Eyes Find the Word High in 14 Secs Previous rate changes	Stay stable for two years

The key reasons for reducing the repo rate are:

1. Economic growth issues

• The economic momentum in India has slowed, with GDP growth of 6.7% in Q1, lower than the 7% projection of the Reserve Bank of India.
• Key economic indicators, such as:
• Vehicle sales decline
• Low cement
• Reduce GST collection
• Cutting the buyback rate can help boost economic activity by making loans cheaper for businesses and consumers.

Influence

• Encourage lending and investment
• Support overall economic recovery
• Helping businesses expand when demand is slow

2. Inflation trend

• Although inflation is volatile, it is expected to be 4.4% in the second quarter of 2025-26, and is expected to decline.
• Lower inflation reduces money leeway, reduces borrowing costs and stimulates demand.

Influence

• Lower repurchase rates can support consumption and investment
• Controlling inflation ensures that cuts do not cause overheating

3. Global economic environment

• The strengthening of the US dollar has resulted in depreciation of the rupee (nearly 2% ytd), making it the worst performing Asian currency.
• Geopolitical tensions and trade uncertainty affect India’s external sectors.
• To cope with global headwinds, the Reserve Bank of India may ease monetary policy to maintain stability.

Influence

• Support domestic liquidity in external shocks
• Encourage capital inflows to offset currency depreciation

4. Things to note in fiscal policy

• Recent budgets have focused on urban middle-class tax cuts, but there is a lack of major economic reforms.
• RBI has:
• Inject liquidity into the banking system.
• Relaxed non-bank loan regulations.
• These steps indicate that monetary policy is eased in 2025.

Influence

• Supplementary fiscal policy to drive economic growth
• Support credit expansion for businesses

5. Market expectations

• Market participants are expected to lower interest rates, proving that:
• Foreign investors bought 182 billion rupees ($2.09 billion) of Indian government bonds in a week.
• In total, the total purchase of foreign debt has exceeded.
• Cutting tax rates will make Indian assets more attractive to investors.

Influence

• Encourage further foreign investment
• Stabilize bond market and currency value

What is the expected repo rate?

Several economic and policy factors support the possibility of cutting repurchase rates:

1. Inflation falls

• Retail inflation (CPI) fell to 5.22% in December 2024, down from 5.48% in November 2024.
• Lower inflation strengthens the situation of reducing borrowing costs stimulating economic activity.

2. Slow GDP growth

• GDP growth rate in Q2FY25 slowed to a 7-quarter low of 5.4%, down from 6.7% of Q1FY25.
• The National Bureau of Statistics (NSO) expects overall GDP growth rate to be 6.4% in fiscal 25.

3. RBI liquidity injection measures

The Reserve Bank of India has recently taken several steps to improve liquidity in the banking system:

• $5 billion forex exchange
• Open market operation of Rs 6 billion
• 56-day variable interest rate repurchase business value Rs 50,000 crore

These measures indicate the reductions by the Reserve Bank of India.

4. Budget 2025 measures

• The union budget 2025-26 introduced personal income tax relief and revised TDS restrictions aimed at increasing disposable income and consumption.
• This rate is consistent with the government’s fiscal strategy as inflation regulates and demand for economic stimulus increases.

5. Global economic uncertainty

• The resurgence of trade tensions (for example, U.S. tariffs on China, Mexico and Canada) have caused volatility in global markets.
• The rupee has depreciated to 87.29 per dollar, raising concerns about import inflation and prompting the Reserve Bank of India to take countermeasures.

What is the market meaning of the reduction in repurchase interest rates in 2025?

1. Impact on borrowers

• If the repo rate is reduced from 6.50%, the external benchmark loan ratio (EBLR) associated with the repo rate will be reduced by 25 basis points.
• Loan EMI for households, cars and personal loans will become cheaper.
• Interest rates on loans related to marginal costs of fund-based loan rates (MCLRs) may also fall, although full transmission may take time.

2. Impact on the banking industry

• Lowering the repurchase rate will lead to a decrease in the interest income of the bank.
• However, increasing liquidity and reducing borrowing costs may increase credit demand, thus benefiting the overall economy.

3. Impact on investment and stock markets

• Cutting tax rates can boost the stock market, especially in areas such as real estate, infrastructure and banking.
• Investors may turn to stocks and bonds, with higher growth and lower financing costs expected.

What will be the expected monetary policy path in 2025?

Economists predict that the Reserve Bank of India will adopt a step-by-step approach to mitigating monetary policy:

moon	Expected price cuts
February 2025	25 barrels (rise to 6.25%)
April 2025	25 barrels (to 6.00%)
October 2025	See more : Optical Illusion IQ Test: You Have Eagle Eyes If You Spot The Hummingbird In This Picture In Less Than 19 Seconds Further cuts may occur

The Economic Research Report of the National Bank of India (SBI) shows that the cumulative decrease of 75 basis points in 2025.

Governor Sanjay Malhotra: The key decision waiting

Who is Sanjay Malhotra?

property	detail
Location	The 26th Governor of the Reserve Bank of India (from December 2024)
background	IAS officials of Rajasthan cadres (1990)
educate	Computer Science (IIT Kanpur), Master of Public Policy (Princeton University, USA)
Previous roles	Secretary of the Taxation Bureau

Policy guidance under Malhotra

• It likely deviated from the hawkish stance of his predecessor, Shaktikanta Das.
• Inflation control is expected to be balanced with economic growth.
• Emphasize strengthening financial stability and ensuring adequate liquidity.

in conclusion

The MPC meeting from February 5-7, 2025 is expected to reduce the repo rate by 25 basis points, marking the first reduction in nearly five years. The decision was driven by a decline in inflation, slowing GDP growth and a positive liquidity indicator for RBI. If implemented, it will reduce loan EMI, increase credit demand and support economic recovery.

However, global trade uncertainty, rupee volatility and future inflation trends will play a crucial role in determining the Reserve Bank of India’s monetary position at the subsequent meeting.

Source: https://dinhtienhoang.edu.vn
Category: Optical Illusion