The Reserve Bank of India (RBI) is expected to announce a 25 basis points (bps) reduction in the repo rate during its monetary policy meeting on February 7.
According to a report by Bank of Baroda, the RBI’s decision to cut the rate comes as inflation shows signs of easing, providing the central bank with room to implement a rate cut.
Inflation has been a key factor in shaping the RBI's monetary policy, and recent trends suggest that it is now stabilising.
The reduction in prices of essential vegetables, including tomatoes, onions, and potatoes, has helped reduce the volatility in the Consumer Price Index (CPI), making it easier for the RBI to consider a rate cut.
With inflationary pressures decreasing, the report believes that the RBI has enough flexibility to make a moderate adjustment to the repo rate.
The report mentions that, after considering both global and domestic factors, there is space for a 25 bps reduction. This includes the dynamics of the domestic economy as well as external challenges such as rising geopolitical tensions.
The ongoing trade disputes and the strengthening of the US dollar have led to increased volatility in asset markets, which has in turn impacted the Indian rupee.
The strengthening of the US dollar has been particularly significant, as it creates ripple effects across global markets. The report notes that the rupee has come under pressure, which, along with the rising uncertainty in international trade policies, has created challenges for financial markets.
While the rupee’s depreciation remains a concern, RBI is also mindful of domestic liquidity conditions, which have been tightening. Slower deposit growth is putting pressure on the banking sector, and liquidity constraints are becoming more evident.
Along with these external factors, domestic growth has also shown signs of slowing down. Corporate results for the third quarter of the fiscal year indicate a decline in sales, highlighting a less optimistic economic environment.
This trend could also be reflected in the Gross Value Added (GVA) of the manufacturing sector. In light of this, the RBI is expected to be cautious in its approach, keeping a close eye on the evolving economic landscape before making any major policy changes.
The report suggests that the RBI will aim to strike a delicate balance between supporting economic growth and maintaining financial stability. While a rate cut is expected, it is likely to be gradual, and any further adjustments will depend on the latest economic data.
The RBI’s cautious stance reflects its commitment to adopting a data-driven approach to monetary policy.
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