Report: RBI may cut Interest Rates by 50 Basis Points in 2025

A report by Bank of Baroda indicates that the Reserve Bank of India (RBI) might reduce interest rates by 50 basis points (bps) in 2025 and shift its stance from neutral to accommodative. The report noted that the central bank has begun a rate-cut cycle and anticipates additional cuts, although the precise timing remains unclear.

It mentioned that with the RBI beginning the rate cut cycle, further reductions are likely, though the exact timing might be uncertain. Overall, we are expecting a 75 basis point cut this year.

The RBI has recently lowered the repo rate by 25 basis points to 6.25 percent, representing the first rate reduction in five years. The Monetary Policy Committee (MPC) unanimously decided to also decrease the Standing Deposit Facility (SDF) rate to 6 percent and the marginal standing facility (MSF) rate to 6.5 percent. Despite these rate reductions, the policy stance remained 'neutral'.

The report predicts a total rate reduction of 75 basis points in 2025. The upcoming policy review in April will evaluate the economic conditions and could result in another rate cut or an adjustment in the policy approach.

The report indicates that inflation is projected to be 4.4 percent in the fourth quarter of FY 2025 and 4.5 percent in the first quarter of FY 2026. Nevertheless, inflationary pressures are expected to diminish from the second quarter of FY26, allowing for additional rate reductions.

The report also mentioned that the fluctuations of the rupee have been factored into the inflation projections. With inflation anticipated to decrease from mid-2025, the RBI is expected to reduce rates further.

During the upcoming rate cut, the monetary policy is anticipated to change from 'neutral' to 'accommodative,' emphasizing more on boosting economic growth. This marks the RBI's first rate cut since the Covid-19 era, indicating a shift in monetary policy to foster economic development.

Reduced interest rates lower borrowing costs for businesses and consumers, which can encourage increased investment and spending. A shift towards an 'accommodative' stance would suggest the central bank's readiness to relax monetary policy to aid economic recovery.

The April monetary policy meeting will be pivotal in deciding the RBI's future actions, as policymakers closely monitor inflation and growth patterns.