The State Bank of India (SBI) economists are predicting that the Reserve Bank of India (RBI) will announce a 0.25% rate cut during its upcoming Monetary Policy Committee (MPC) meeting scheduled for February 7, 2025. According to an SBI Research report released on February 3, the RBI has the room to implement these cuts in the short term as the fiscal stimulus from Budget 2025-26 begins to take effect.
The report further suggests that, over the course of the year, the RBI could implement a cumulative rate cut of at least 0.75%, with two successive cuts scheduled for February and April 2025. A third round of cuts could follow in October 2025, after a gap in June. This outlook aligns with the current economic scenario and expected trends in inflation and global market conditions.
Room for Rate Cuts
SBI Research believes that there is enough space for rate cuts due to the ongoing fiscal stimulus in the Indian economy. The RBI's ability to cut rates in the short term has been supported by the pause in rate hikes by the US Federal Reserve. This provides the RBI with an opportunity to assess inflationary expectations and adjust accordingly.
The report also highlights the need for careful coordination between monetary policy and fiscal policy. As the Indian government follows its Fiscal Responsibility and Budget Management (FRBM) path, the balance between the two will require strategic management to ensure economic stability.
Challenges with Liquidity and Inflation Control
The report touches on India's liquidity situation, which remains tight. As of January 31, 2025, the average liquidity deficit stood at Rs 1.96 lakh crore. However, RBI’s recent liquidity injections could help bring the system into a surplus, with a projected Rs 0.6 lakh crore in durable liquidity by the end of FY25. This surplus could help stabilize credit flow across the economy, which has faced some challenges in recent months.
The report also points out the necessity for the RBI to revisit its Liquidity Framework to better manage the flow of credit. Tight liquidity, especially in the banking system, could hamper the economy’s credit growth, which is already showing signs of moderation despite the government's fiscal efforts.
Global Economic Outlook and Impact
Globally, the economic outlook remains relatively stable. The world economy is projected to grow by 3.2-3.3% in 2025, with global inflation continuing to soften. However, the impact of potential trade wars remains uncertain. While trade tensions, particularly between the US and other countries, may have some impact on global growth, these effects are not expected to cause significant disruptions at this stage.
In India, the economy enters the fourth quarter of the fiscal year under the influence of the Union Budget 2025-26. The fiscal stimulus, aimed at supporting consumption, is expected to ease market conditions and help manage the country’s fiscal deficit. With the government’s borrowing plan set at Rs 11.5 lakh crore for FY26, SBI economists anticipate a comfortable financing situation, with 75% of the deficit financing likely to be done through long-term instruments.
Despite a moderate credit growth trend, the banking system's liquidity position is expected to remain positive, offering a supportive environment for credit flow as the year progresses.