The Reserve Bank of India (RBI) may cut interest rates further by 50 basis points (bps) in 2025 and shift its stance from “neutral” to “accommodative,” according to a report by Bank of Baroda. The report suggested that the central bank has entered a rate-cut cycle, and more reductions are expected, though the exact timing remains uncertain.
It said “As RBI embarks upon the rate cut cycle, it can be expected that more cuts are also on the cards, while the timing can be debatable. Cumulatively, we are pricing in 75bps cut in this calendar year”.
The RBI recently reduced the repo rate by 25 bps to 6.25%, marking the first-rate cut in five years. The decision, taken unanimously by the Monetary Policy Committee (MPC), also lowered the Standing Deposit Facility (SDF) rate to 6% and the Marginal Standing Facility (MSF) rate to 6.5%. Despite the rate cut, the policy stance was retained as “neutral.”
The report projects a cumulative rate cut of 75 bps in 2025. The next policy review in April will assess the economic situation and could lead to another rate reduction or a change in policy stance.
RBI MPC: What Else?
The report highlighted that inflation is expected to remain at 4.4% in the fourth quarter of FY25 and 4.5% in the first quarter of FY26. However, inflationary pressures are likely to ease from the second quarter of FY26 onwards, creating more room for further rate cuts.
The report also notes that rupee volatility has been factored into inflation projections. Given the expected decline in inflation from mid-2025, the RBI is likely to reduce rates further. At the time of the next rate cut, the monetary policy stance is also expected to shift from “neutral” to “accommodative,” signaling a stronger focus on supporting economic growth.
This is the first-rate cut by the RBI since the COVID-19 period, reflecting a shift in monetary policy to support economic growth. Lower interest rates make borrowing cheaper for businesses and consumers, potentially boosting investments and spending. The change in stance to “accommodative” would further indicate the central bank’s willingness to ease monetary policy to support economic recovery.
The April monetary policy meeting will be crucial in determining the RBI’s next steps, with policymakers closely monitoring inflation and growth trends.
