The Reserve Bank of India (RBI) is expected to cut its key interest rate by 25 basis points this week, after holding it steady for two years. This move is seen as a complement to the Union Budget measures aimed at boosting consumption-driven demand, although the weakening rupee remains a persistent concern.
Experts suggest that since retail inflation has stayed within the Reserve Bank’s target range (below 6 percent) for most of the year, the central bank may now opt for a rate cut to stimulate growth, which has been impacted by weak consumption.
The Reserve Bank of India (RBI) has maintained the repo rate (short-term lending rate) at 6.5 percent since February 2023. The last rate cut occurred during the Covid-19 pandemic in May 2020, after which the rate was progressively increased to its current level of 6.5 percent.
Newly appointed Reserve Bank Governor Sanjay Malhotra will preside over his first Monetary Policy Committee (MPC) meeting, set to begin on Wednesday. The six-member panel’s decision will be revealed on Friday, February 7.
“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,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
Sabnavis further noted that the Union Budget has given a boost to the economy, and it may be prudent to lower the repo rate in parallel to sustain and support this momentum.
On January 27, the Reserve Bank announced measures to inject Rs 1.5 lakh crore into the banking system. “We may see adjustments in the growth forecast, particularly as the National Statistical Office (NSO) had projected 6.4 percent for the year. It will be interesting to see if the RBI provides a growth forecast for FY26, although this is typically released in the April policy,” he added.
Aditi Nayar, Chief Economist and Head of Research and Outreach at Icra, stated that the growth-inflation dynamics have improved since the December 2025 policy meeting. “We do not believe the fiscal stimulus from the Union Budget will have a significant impact on inflation. Therefore, we think the balance now leans towards a rate cut in the February 2025 policy review,” she said.
However, Nayar added that if global factors lead to a further significant weakening of the INR/USD exchange rate this week, the expected rate cut could be postponed until April 2025. On Monday, the rupee fell by 55 paise, closing at a record low of 87.17 (provisional) against the US dollar.