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All eyes on RBI: Will it cut rates to prop up growth?


The Union Budget 2025-26 has finally met the long-awaited demand of the middle class, pinned down as it is by a persistent inflation, particularly of...
The Union Budget 2025-26 has finally met the long-awaited demand of the middle class, pinned down as it is by a persistent inflation, particularly of food items, and stagnancy in wages despite a record surge in the after-tax profits of corporates. FM Nirmala Sitharaman did not waver at the outgo of Rs 1 lakh crore due to tax exemption for up to Rs 12 lakh, saying the tax base itself is small and reposes trust in the middle class loosening their purse strings to boost private consumption – a critical factor amid RBI lowering GDP forecast to 6.6% from 7.2%, and govt lowering it to 6.4%.
Even as the dust has settled and analysts are poring over allocations for critical sectors, the euphoria among the middle class is spilling over and all eyes are now on the Reserve Bank of India if it will also cheer them by easing interest rates.
The next RBI Monetary Policy Committee meeting is scheduled from February 5 to 7. There are keen expectations from the common man and the industry alike for lower rates. Following a budget booster to private consumption, in view of slackness in investments by industry and businesses, people feel enthused about the new RBI Governor Sanjay Malhotra recognising the need to support growth rather than status quo for fear of stoking inflation further. They feel the onus is on the RBI to further stimulate the demand generation.
In recent weeks, the RBI undertook certain measures to infuse liquidity in the system, despite the inflation ruling above its target (4% with +/- 2%). For more than four years, it has shunned easing the repo rate from 6.5%. The repo is the rate that the RBI lends to commercial banks. RBI also uses cash reserve ratio or CRR, the percentage of a bank’s deposits that it must keep in reserves with the RBI. By raising or lowering the CRR, the central bank affects liquidity in the economy. In December 2024, the RBI slashed the CRR by 50 basis points to 4% to influse ₹1.16 lakh crore into the banking system.
It is true that interest rate cuts won’t increase disposable incomes of consumers, unlike fewer taxes or more direct benefit transfers; but, they will lead to more investments and less unemployment. A cut in repo rate will lead to lower loan interest rates, paving way for more borrowing and spending in the economy.
But there are as many sceptics as hopefuls. They point out that with the inflation not showing any signs of abatement, the central bank may not be willing to risk making borrowing any less expensive for banks. If done, it will increase money supply in the system, making it difficult to cool down inflation. They are pouring water on high expectations of interest rate cuts in wake of record depreciation in the rupee value, by as much as 3%, due to external pressures and a slowing economy.
Even then, there is still room for moderate rate cuts, contend the hopefuls. They base their argument that CRR has been used in the past to set the stage for easing in interest rates in the coming quarters if the inflation-growth balance improves. The December 2024 CRR slash is a case in point. Many an analyst is expecting the RBI to prioritise growth over inflation concerns and cut repo by 25 basis points, and bring it further later if external factors favour. Domestically, in December, retail inflation slid to 5.22% from 5.48%, the lowest in four months. Softening food inflation, thus, raises rate cut hopes. Whether the RBI will go for a rate cut, and also infuse liquidity, when rupee is under pressure is the question doing the rounds now.

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