India's Benchmark Rates: A Likely Cut Amidst Economic Slowdown and Easing Inflation

The Reserve Bank of India (RBI) is expected to trim its benchmark policy repo rate by 25 basis points to 6.25% at its upcoming policy meeting, marking the first rate cut in nearly five years. This decision comes amidst a slowing economy and easing inflation, with the annual retail inflation rate dropping to 5.22% in December 2024, the lowest since August 2024.



The Indian economy expanded by just 5.4% in its second fiscal quarter ending September 2024, well below estimates and close to a two-year low. This slowdown signals the need for monetary policy easing to stimulate growth. However, the RBI must also consider the potential impact of rate cuts on domestic demand and inflation, while monitoring global developments and the currency market.

The recent easing of inflation, particularly in food prices, has offered more room for the RBI to consider rate cuts. Food inflation, a significant contributor to overall inflation, has been declining, with vegetable prices easing and a likely good output for winter crops and adequate cereal buffer stocks expected in the coming quarters. This decline in food inflation has contributed to the overall easing of retail inflation.

However, the weakening rupee has made it tougher to loosen monetary policy. The rupee depreciated to a record low of 86.58 against the dollar in December 2024, which could impact the RBI's decision to cut rates. A depreciating currency could force the RBI to keep rates elevated to support the currency, potentially limiting the extent to which it can cut rates without compromising its inflation target.

The RBI's monetary policy stance will likely be influenced by its updated inflation projections for the coming quarters. If the RBI expects inflation to remain below its 4% target, it may adopt a more accommodative stance and consider rate cuts to stimulate economic growth. However, if the RBI anticipates that inflationary pressures will persist, it may maintain a tight monetary policy to control inflation and support the currency.

In conclusion, the Reserve Bank of India is expected to cut its benchmark policy repo rate by 25 basis points to 6.25% at its upcoming policy meeting, balancing the need for economic growth with the risk of resurgent inflation. The recent easing of inflation, particularly in food prices, has offered more room for rate cuts, while the weakening rupee presents a challenge to monetary policy easing. The RBI's decision will be influenced by its updated inflation projections for the coming quarters, as it seeks to maintain a balance between growth and inflation control.