RBI Policy today: MPC likely to announce rate cut; 5 things to know before the decision

The RBI last reduced the repo rate by 40 basis points to 4% in May 2020 to help the economy weather the crisis following the outbreak of the COVID-19 pandemic and subsequent lockdown.

However, in May 2022, the central bank started a rate hike cycle because of the Russia-Ukraine war and paused it only in May 2023.

The three-day meeting of the MPC started on Wednesday, February 5.

"We expect the MPC to vote for a 25 bps rate cut in the repo rate to 6.25% after an extended pause since February 2023," DBS Group Research Senior Economist Radhika Rao said.

Newly appointed Reserve Bank Governor Sanjay Malhotra will chair his first Monetary Policy Committee (MPC) meeting starting Wednesday.

Experts opined that the situation is now conducive for a rate cut, as it will complement the initiatives announced in the Union Budget to push consumption-led demand growth.

An SBI research report said the consumer price index (CPI)-based retail inflation is expected to come down to 4.5% in the fourth quarter and an average of 4.8% in the current financial year. It also said the January inflation numbers are trending closer to 4.5%.

Given the fiscal stimulus and the uncertain impact of trade wars, RBI faces the delicate task of balancing the risks. As the budgetary stimulus plays out, the central bank, at least in the short run, has room for rate cuts, it said.

Madan Sabnavis, Chief Economist, Bank of Baroda, echoed similar views.

"There is a higher probability of a rate cut this time for two reasons. First, the RBI has already announced liquidity enhancement measures, which have improved conditions in the market. This appeared to be a prerequisite for cutting rates," Sabnavis.

Sabnavis further said the Union Budget has provided a boost, and it may be appropriate to lower the repo rate in tandem to support the same.

The RBI announced measures to infuse ₹1.5 lakh crore worth of liquidity in the banking system on January 27.