New Delhi, Feb 4
The Reserve Bank of India (RBI) is expected to announce a 0.25% rate cut in its Monetary Policy Committee (MPC) meeting on February 7, according to an SBI Research report released on Tuesday.
As the fiscal stimulus from the Union Budget 2025-26 unfolds, the RBI has short-term flexibility for rate cuts. The report also projects a cumulative rate cut of at least 0.75% over the cycle, with two successive rate cuts in February and April 2025.
Expected Rate Cut Timeline
- First Phase: February & April 2025 (two successive rate cuts)
- Second Phase: October 2025 (after a pause in June)
With the US Federal Reserve currently pausing rate hikes, the RBI has time to assess inflation expectations before further easing.
Monetary & Fiscal Coordination Crucial
The tight liquidity situation needs to be addressed as it could impact credit flow in the economy, the report noted. Key observations include:
- Average liquidity deficit (Dec 16, 2024 – Jan 31, 2025): ₹1.96 lakh crore.
- Average Government of India cash balance: ₹2.1 lakh crore.
SBI Research estimates that by the end of FY25:
- Durable liquidity may be around ₹0.6 lakh crore.
- System liquidity may be ₹1 lakh crore surplus.
Global Economic Resilience & Trade War Uncertainty
- Global GDP growth forecast: 3.2-3.3% by 2025.
- Inflation softening worldwide, approaching central bank targets.
- Trade war concerns could impact global growth by 30-50 basis points, with regional variations.
India’s Economic Outlook & Fiscal Position
As India enters Q4 FY25, the Union Budget 2025-26 plays a significant role in:
- Boosting consumption through fiscal stimulus
- Maintaining fiscal consolidation
- Ensuring net market borrowings of ₹11.5 lakh crore for FY26
Financing of the fiscal deficit remains comfortable, with 75% expected to be covered through long-term instruments. The RBI’s ongoing OMO (Open Market Operations) purchase of ₹60,000 crore represents 3.8% of available AFS (Available for Sale) securities as of Sep 2024.
Credit Growth & Banking System Liquidity
- Credit growth remains moderate despite sequential slowdown
- Durable liquidity by FY25-end: ₹0.6 lakh crore
- System liquidity surplus: ₹1 lakh crore
With government spending and financial policies working together, India’s economy remains stable. There is also a chance of lower interest rates, which can help increase lending and boost growth.
