RBI likely to cut policy rate by 75 bps in 2025, starting with 25 bps in Feb: SBI Research

The report suggests that the rate-cutting cycle will start with a 25-bps reduction in February.

"Cumulative rate cuts over the cycle could be at least 75 basis points, with two successive cuts in February and April 2025. After a pause in June 2025, another round of rate cuts could resume in October 2025," it stated.

The Reserve Bank of India (RBI) is set to announce its policy review on February 7.

The domestic rate-setting panel has maintained the policy repo rate at its current level for 11 consecutive meetings, following a cumulative hike of 250 basis points between May 2022 and February 2023.

The last time the Central bank cut rates was in May 2020, during the Covid-19 pandemic.

On February 3, a Moneycontrol poll of bankers and economists also indicated that the RBI is likely to cut the policy rate by 25 bps in February, citing factors such as sluggish growth, government advance estimates, and recent liquidity infusion measures.

According to a Business Standard poll of 10 participants, all but Yes Bank expect the RBI’s six-member Monetary Policy Committee (MPC) to lower the policy repo rate for the first time in nearly five years. The majority of respondents foresee a 25-basis-point reduction. They also noted that recent liquidity measures introduced by the RBI have further strengthened the likelihood of a rate cut.

Rate trajectory

The RBI has kept the repo rate unchanged at 6.5% since April 2023, following a 250-bps hike between May 2022 and February 2023 to curb inflation. In its December 2023 Monetary Policy Committee (MPC) meeting, the central bank held rates steady for the 11th consecutive time to maintain inflation within the medium-term target of 4%.

Although the RBI has refrained from cutting rates, in October 2023, the MPC shifted its stance from 'Withdrawal of accommodation' to 'Neutral', signaling openness to policy adjustments while not committing to an immediate rate cut.

Inflation outlook

Despite an upward trajectory, inflation is projected to ease to 4.5% in Q4 FY25, averaging 4.8% for the full fiscal year, according to SBI Research.

"Based on this trend, we estimate FY26 inflation may range between 4.2% and 4.4%, while core inflation is expected to stay between 4.4% and 4.6%. By September 2025, core inflation may surpass headline inflation. Due to base effects, headline inflation could average 3.6% to 3.8% in Q3 FY26," the report noted.