New Delhi, Feb 5
The Reserve Bank of India (RBI) is likely to reduce the repo rate by 25 basis points, marking its first rate cut in nearly five years, experts said on Wednesday. This move aligns with the Union Budget’s focus on boosting economic activity while maintaining fiscal stability.
The last time the repo rate was reduced was in May 2020, when it was cut by 40 basis points to 4% to support the economy during the COVID-19 crisis. Currently, the repo rate stands at 6.50%.
Why a Rate Cut is Expected?
- The Union Budget emphasizes reviving consumption and supporting growth, making a rate cut more likely.
- The government’s balanced borrowing strategy and steps to improve liquidity create a favorable environment for monetary easing.
- GDP growth has slowed to 5.4% in Q2 FY25, the lowest in seven quarters, increasing the need for a stimulus.
- The RBI’s Monetary Policy Committee (MPC) shifted to a neutral stance in October 2023, allowing for greater flexibility in policy decisions.
Impact on the Economy
A repo rate cut would have several benefits:
- Lower borrowing costs for home buyers, boosting real estate demand, especially in the lower and mid-income segments.
- Improved liquidity in the banking system, making it easier for businesses and developers to access financing.
- Increased consumer confidence, leading to higher spending and economic growth.
According to Bajaj Broking Research, the RBI has kept the repo rate unchanged for 11 consecutive meetings after raising it by 250 basis points between May 2022 and February 2023. With inflation under control and growth slowing, a gradual rate-cutting cycle is expected.
While the RBI is ensuring adequate liquidity, a cut in the Cash Reserve Ratio (CRR) is unlikely in the next policy announcement. Instead, the central bank is expected to maintain a supportive financial environment while making small adjustments to interest rates.
With all these factors in play, the anticipated rate cut could provide a much-needed boost to the economy, making loans cheaper and encouraging investment.
