The Reserve Bank of India (RBI) is expected to reduce interest rates for the first time in almost five years this Friday. Experts, including economists and bank officials, believe that the newly formed Monetary Policy Committee (MPC), which will meet from February 4-7, may announce this decision. Under the leadership of the new RBI Governor, Sanjay Malhotra, the committee is likely to lower the repo rate (the main lending rate) by 25 basis points (bps), bringing it down from 6.5% to 6.25%. The final decision will be announced on February 7.
Even though inflation is still above RBI’s target of 4%, experts feel the rate cut might happen because of slow economic growth, government estimates, and various measures already taken to improve liquidity (availability of money in the market).
If the rate is reduced, it will help increase spending in India. Combined with income tax relief for people earning up to Rs 12 lakh, the rate cut could encourage more people to spend, boosting the economy.
“We still expect a rate cut in February, as inflation is slowing down. Food prices, especially vegetables, have fallen, which may bring CPI inflation to 4.5% in January,” said Gaura Sengupta, Chief Economist at IDFC First Bank.
Experts predict that interest rates may drop further by 50-75 bps in 2025. After the expected February cut, another 25-50 bps reduction may happen in the coming months.
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