RBI MPC Meeting Highlights: RBI governor Sanjay Malhotra announces 25 bps repo rate cut as Trump's tariffs add to uncertainties; GDP growth outlook cut to 6.5%

RBI Rate Cut (Feb 2025): The RBI reduced the repo rate by 25 basis points to 6.25% to stimulate growth amid moderating inflation. Economists expect another 25 basis point cut to support growth, especially given recent external pressures.

US Tariff Impact: The US imposed a 26% tariff on Indian imports. This is expected to reduce India’s GDP growth for FY2025-26 by 20–40 basis points, potentially lowering it to around 6.1% from the RBI’s earlier forecast of 6.7%. This may push the RBI toward further rate cuts to counter economic strain.

Inflation Outlook: Retail inflation (Consumer Price Index) for FY2025-26 is projected at an average of 4.2%, with quarterly figures at 4.5% (Q1), 4% (Q2), 3.8% (Q3), and 4.2% (Q4). These manageable levels could offer the RBI room to adjust rates to support growth if needed.

New Deputy Governor Appointment: Poonam Gupta, former World Bank and IMF economist, has been appointed as RBI’s new deputy governor. Known for supporting a relook at inflation targeting and a more flexible exchange rate policy, she is expected to bring fresh perspectives to policy discussions.

Liquidity Framework Proposals: Indian lenders have suggested reforms to the RBI’s liquidity management framework. Key suggestions include moving from the 14-day variable rate repo to an overnight fixed-rate liquidity tool, adopting the Secured Overnight Rupee Rate (SORR) as a new benchmark, and reducing the Cash Reserve Ratio (CRR) to ease liquidity constraints.

Conclusion: The upcoming RBI policy meeting is set against a backdrop of moderating inflation, external economic challenges, and proposed changes in liquidity management. The MPC’s decisions will be crucial in balancing growth and price stability amid global uncertainties, says Bajaj Broking Research.

The impact of current market volatility on retail investor behaviour requires long-term observation rather than immediate assessment. A considerable reduction in the difference between savings account and fixed deposit rates is essential for increasing the proportion of current and savings accounts, according to Anil Gupta, senior vice president, ICRA.

"We are not expecting a steep reduction in FD rates because of the pressure on the liquidity coverage ratio for banks. We believe that the rate cut will be higher for wholesale deposits. So if we assume a 75 basis point reduction in the repo rate in the current cycle, we think that the funding costs will go down by 30-35 basis points," Gupta added.

Madan Sabnavis, chief economist, Bank of Baroda, said, "Transmission is the tricky issue which will depend on how individual banks are placed. With liquidity normalizing and likely to remain calm for some time, there is a higher possibility of banks lowering deposits rates now, though not in a commensurate manner. This can move the Marginal Cost of Funds-based Lending Rate (MCLR) and overall lending rates."

The Bank of Baroda economist further elaborated that whilst External Benchmark Lending Rates (EBLR) follow the repo rate trajectory, MCLR-based loans are connected to deposit rates. He noted that given the comfortable liquidity situation, a more substantial rate transmission could be anticipated if the RBI implements additional rate reductions.

The Reserve Bank is likely to declare a further reduction of 25 basis points in the repo rate when its three-day monetary policy committee meeting concludes on Wednesday. Nevertheless, banks may take longer to incorporate this reduction into their funding expenses. This delay can be partially attributed to evolving depositor patterns, as more individuals are opting to invest in equity markets and transfer excess money from savings accounts into term deposits.

“We anticipate a 25 basis point reduction in the repo rate at the upcoming MPC meeting. The move is aimed at stimulating economic growth in light of easing inflation. This will provide the necessary boost to key sectors. While some anticipate the rate will remain unchanged to maintain economic stability amidst global trade tensions, the prevailing conditions point to a move towards easing, which will drive momentum for growth across the board.

Maintaining or adjusting the repo rate will undoubtedly have a significant impact on India’s housing sector. A reduction in the repo rate could stimulate demand by making home loans more accessible and affordable. However, the real impact on home loan rates will largely depend on how quickly banks pass these benefits onto borrowers.
Stability in interest rates is crucial to sustain housing demand, particularly in the mid-range and luxury segments, providing a sense of certainty for both homebuyers and developers.

On a broader scale, India's retail inflation has dropped below 4%, touching 3.61% in February 2025, primarily due to lower vegetable prices. This decline may give the Reserve Bank of India the flexibility to consider a rate cut, which could further boost economic growth.

The upcoming MPC meeting will be pivotal. Its outcome will be closely monitored, as it will significantly influence various sectors, including housing. Whether the RBI decides to reduce the rate or maintain the status quo, the decision will have a crucial impact on borrowing costs and the overall economic momentum in the months to follow,” says Atul Monga - CEO & Co-Founder, BASIC Home Loan.

The Reserve Bank of India started interest rate cuts in February with a 25 basis point cut in the repo rate, whilst deposit rates have remained largely static. Although banks have extended the advantage to home loan customers, the effect on depositors has been minimal.

RBI statistics indicate that the weighted average domestic term deposit rate (WADTDR) reached an eight-year peak of 6.91% in 2024-25. The WADTDR hit a nine-year maximum of 7.02% in February.

A select few financial institutions, including Bank of Baroda, HDFC Bank, and Yes Bank, have lowered rates between 15 to 40 basis points. Nevertheless, this reduction has not led to a broader decrease in fixed deposit rates across the banking industry.

The lack of a comprehensive reduction is apparent in both the weighted average deposit rate and the marginal cost of lending rate, which affects bank lending to commercial entities.