SBI Research anticipates RBI repo rate cut in February policy meet

NEW DELHI: Reserve Bank is expected to cut repo rates in February 2025 and such a decision, it at all taken, is unlikely to be impacted by rupee's weakness against the dollar, asserted SBI Research in a report.

The report put out the day RBI announced its monetary policy, the SBI Research report said it expects RBI to cut rates in February 2025 cumulative 75 basis points.

"...and such a decision is unlikely to be impacted by what is happening to US Dollar, as was the case in 2018 when the RBI did not hike rates even as rupee was under enormous pressure," read the report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

As expected, RBI monetary policy committee decided to keep repo rate at 6.50 per cent (eleventh-time in a row), however, this time also not unanimously. Two of the newly inducted members voted to reduce the policy repo rate by 25 basis points.

The monetary policy committee unanimously decided to continue with the neutral monetary policy stance and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting economic growth.

RBI has also revised upwards its inflation projection for 2024-25 by 30 basis points to 4.8 per cent, given the recent uptrend in the numbers.

India's retail inflation was at 6.21 per cent in October, breaching the Reserve Bank of India's 6 per cent upper tolerance level. High food inflation in October was mainly due to an increase in the inflation of vegetables, fruits, and oils and fats. Inflation data for November is due later this week.

"The outlook for inflation will be largely shaped by food inflation trajectory (on positive side softening in vegetable prices while on negative side adverse weather events and rise in international agricultural prices)," the SBI Research report said.

Further, RBI has sharply downgraded its real GDP growth forecast for 2024-25 from 7.2 per cent to 6.6 per cent with risks evenly balanced.

"Such a downward revision in growth forecast is nothing new as in 2021-22 and 2022-23 the growth forecasts were downgraded on an average by 90 basis points," the SBI Research report said.

"In current fiscal, growth forecast was indeed revised, but upwards from 7 per cent to 7.2 per cent. This is the first time in the last five years that the RBI has first revised the growth estimates upwards and then downwards to 6.6 per cent. This is indeed an implicit recognition by RBI of missing the growth estimates by a wide margin."

SBI Research believes that GDP growth for 2024-25 will be lower than the RBI's estimate and it pegged the GDP growth at 6.3 per cent for 2024-25.