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RBI monetary policy All eyes are on the Reserve Bank of India (RBI) to fulfill its role in recovering the nation's flagging economic growth. Budget 2025 demonstrated the government's concentrated focus on fiscal austerity and steps to stimulate consumption and economic growth.
According to experts, India's current growth-inflation dynamics have produced an almost ideal scenario calling for a rate cut. The central bank may announce a modest rate lowering of 25 basis points on Friday, February 7.
The dynamics of growth and inflation in India
India's gross domestic product (GDP) estimates have been falling in recent quarters. The country's Q2FY25 GDP growth rate dropped for the third consecutive quarter to 5.4%, the lowest level in almost two years. On February 28, the Ministry of Statistics and Program Implementation (MoSPI) will make the Q3 GDP figures public.
Although it hasn't yet reached concerning levels, growth has halted and requires monitoring.
Despite uncertainty worldwide, Economic Survey 2025 projects that India's real GDP growth in FY25 might be 6.4%, which is close to the decadal average.
In contrast, retail inflation in India decreased to a four-month low in December. According to MoSPI data, retail inflation, which is measured by the Consumer Price Index (CPI), increased 5.22 percent in December, compared to 5.48 percent in November and 5.69 percent a year earlier.
Inflation is anticipated to progressively decline to about 4% in FY26.
Why the RBI might not postpone a rate reduction
Donald Trump's tariff measures run the danger of creating global uncertainty, but the RBI would like to move quickly to boost system liquidity. Given the stability of oil prices and the reduction in inflation risk, a rate cut might be the best course of action.
"GDP growth has slowed to 5.40 percent, and it might take two to three quarters for it to recover. Food inflation has been higher than anticipated, mostly because of the short-term supply-demand mismatches that have driven up the price of onions and tomatoes. The risk of inflation may be very low at this time due to the stability of oil prices.
"A rate reduction and actions to improve liquidity are unavoidable. The next rate decrease in the US will come considerably sooner than anticipated, according to Thomas, who noted that the US Fed has already lowered rates three times.
According to experts, the US Fed's delay on interest rate cuts might not stop the RBI from doing so because it will concentrate more on the state of the local economy.
Rate reduction by the RBI: Should we expect a brief cycle of rate cuts?
Because the central bank must take changing local and international conditions into consideration, the rate-cut cycle may be brief. Climate change continues to increase the probability of unequal rainfall at home, while the "Trump factor" increases uncertainty internationally. How he will become involved in Middle Eastern matters is unknown.
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