Introduction to RBI’s Monetary Policy
The Reserve Bank of India (RBI) is set to announce its monetary policy next week, and expectations are high that the central bank will cut its repo rate by 25 basis points to 5.25%. The repo rate refers to the interest at which the central bank lends short-term funds to commercial banks and is considered a benchmark for all lending rates in the economy.
Understanding the Repo Rate
A basis point is one-hundredth of a percent. The meeting of the RBI Governor Sanjay Malhotra-headed Monetary Policy Committee (MPC) is scheduled from December 3 to 5, and the repo rate decision will be announced on December 5. The RBI has held rates at 5.5% since August after a cumulative 100 bps of cuts in the first half of the year.
Factors Influencing the Rate Cut
A sharp fall in food prices and GST rate cuts have driven consumer inflation to a record low of 0.25% in October, giving the central bank room to support weak consumption. According to Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Group, "We expect the RBI to announce a 25-basis-point rate cut, supported by benign headline inflation. Food prices are likely to remain in deflation, keeping overall inflation comfortably below target through the end of the fiscal year, aided further by the pass-through of GST rate cuts."
Expectations from Economists
Nearly 80% of economists, 62 of 80, in a November 18-26 Reuters poll forecast the RBI would lower the repo rate to 5.25% at its December policy meeting. The remaining 18 forecast no change. While the deflation in food prices is expected to be temporary, core inflation — excluding the impact of gold — is running below the 4% target.
Challenges to Monetary Easing
However, pressures from a widening goods trade deficit and continued foreign portfolio investor outflows have weighed on the rupee, presenting a counterpoint to immediate monetary easing. The rupee hit a fresh low of 89.49 against the dollar on Friday. Nonetheless, the RBI retains multiple tools beyond the policy rate to manage external balances and currency stability, even as it guides monetary conditions toward greater accommodation.
Impact on the Economy
The RBI repo rate cut expectations come ahead of the announcement of India’s Q2 GDP data. India’s economic growth will likely stay robust at 7.2% in the July-September quarter, slightly lower than 7.8% in the preceding one, a poll of 15 economists showed. Expectations on Dalal Street are also high for a rate cut by Governor Sanjay Malhotra-led MPC next week.
Expert Opinions
According to Mayur Modi, Co-founder, and Co-CEO of Moneyboxx Finance, "As the RBI MPC convenes this month, all indicators point toward a favourable environment for a calibrated rate cut. Inflation has softened significantly, liquidity conditions have stabilised, and economic activity remains robust — creating an opportunity for the MPC to shift toward a more growth-supportive stance." However, Manoranjan Sharma, Chief Economist at Infomerics Ratings expects the MPC to hold the repo rate steady in December because while the growth-inflation trade-off is the determining characteristic of the monetary policy, one data point is insufficient.
Previous Policy Highlights
In its October policy, the RBI MPC unanimously voted to keep the repo rate unchanged at 5.50%. The rate-setting panel also maintained the policy stance as ‘Neutral’. Thus, the Standing Deposit Facility (SDF) rate remained at 5.25%, while the Marginal Standing Facility (MSF) rate was at 5.75%. The RBI raised FY26 GDP growth estimates to 6.8% from 6.5% earlier, and also reduced FY26 CPI inflation forecast to 2.6% from 3.1% earlier.
Conclusion
In conclusion, the RBI’s upcoming monetary policy announcement is highly anticipated, with expectations of a 25 basis point rate cut to 5.25%. The decision will be influenced by factors such as low inflation, stable liquidity, and robust macroeconomic conditions. While some experts expect a rate cut, others believe that the MPC will hold the repo rate steady due to concerns over food inflation and external balances. Ultimately, the RBI’s decision will have a significant impact on the economy, and it is essential to consider the views of various experts and analysts to make informed decisions.
