The RBI's Bold Liquidity Push: Will February 2025 Bring a Much-Needed Rate Cut?

The Big News: RBI's Liquidity Injection Plan

In a significant move on January 27, 2025, the Reserve Bank of India (RBI) announced measures to inject liquidity into the banking system. This initiative includes:

1. Open Market Operations (OMO): A purchase of Rs 60,000 crore in three tranches.

2. Variable Rate Repo Auction: Scheduled for next month to ease short-term liquidity constraints.

3. Dollar-Rupee Swap Auction: A $5 billion buy/sell swap for a tenor of six months, set for January 31.

These steps are designed to provide a cushion for the financial system amidst slowing economic growth and moderating inflation.

Experts Anticipate a February Rate Cut

The recent liquidity measures have sparked discussions among economists regarding the possibility of a repo rate cut during the upcoming MPC meeting.

• Kotak Mahindra Bank Chief Economist Upasna Bhardwaj emphasized that these steps increase the likelihood of monetary easing.

• Bank of Baroda Economist Aditi Gupta noted that easing liquidity aligns with the need for growth support, especially as government spending picks up towards the fiscal year-end.

This growing sentiment comes as the RBI has maintained its repo rate at 6.5% since April 2023, after a series of hikes from May 2022 to February 2023.

Economic Context: Why a Rate Cut is Crucial Now

India’s economy has shown signs of slowing, with GDP growth projected at 6.4% for FY25—its lowest in four years. This forecast follows weaker-than-expected growth in manufacturing and investment.

The RBI previously revised its FY25 GDP growth estimate from 7.2% to 6.6%, citing subdued trends in key economic indicators and sluggish credit growth.

Additionally, inflation has been moderating:

• December 2024 Inflation: 5.22% (four-month low), driven by easing food prices.

• Food Inflation: Dropped to 8.4% in December from 9% the previous month.

These figures, coupled with fiscal consolidation and a stabilizing dollar, have bolstered the case for a rate cut to support growth.

Market Reaction: Bond Yields and Investor Sentiment

Following the RBI's liquidity measures, Indian bond yields dropped by 5 basis points. The rupee, however, opened 17 paise lower due to a strengthening dollar index.

Experts predict that the RBI's monetary easing measures, if coupled with a rate cut, could:

• Boost investor confidence.

• Encourage borrowing and investment in key sectors.

• Strengthen India's recovery prospects amidst global uncertainties.

Looking Ahead: Will the RBI Deliver?

The upcoming MPC meeting is expected to be a pivotal moment for India’s monetary policy. The central bank must balance its commitment to taming inflation with the pressing need to support economic growth.

DBS Group Research aptly summarized the current scenario, stating, "Amidst decelerating inflation, softening demand, and ongoing fiscal consolidation, the onus is on monetary policy to assume a growth-supportive tone."

As India navigates its economic challenges, all eyes will be on the February MPC meeting to see if the RBI takes the bold step of reducing the repo rate.

In conclusion, The RBI’s recent actions highlight its proactive approach to ensuring liquidity and supporting growth. With inflation easing and economic growth slowing, the central bank has set the stage for a potential rate cut—a move that could provide much-needed relief to businesses and consumers alike. The February MPC meeting promises to be a defining moment for India’s financial landscape, with significant implications for the country’s economic trajectory in 2025 and beyond.