RBI Monetary Policy Preview: MPC to Deliver a Rate Cut

With FY26 budget now behind us, attention turns to the Reserve Bank of India’s (RBI) upcoming Monetary Policy Committee (MPC) meeting, scheduled for February 5-7. This will be the final policy review for FY2025, and the decision on rates comes at a time when the economy is showing signs of deceleration, inflation is moderating and external uncertainties persist.

Growth and Inflation Trends: A More Uncertain Macro Backdrop

Economic activity appears to lost momentum again in January, after having picked up in Q3 FY2025. This follows a weaker-than-expected GDP growth print in Q2. Agricultural output has been robust, with a healthy kharif harvest and encouraging trends in rabi sowing for wheat and rice, which should support rural demand. Meanwhile, high-frequency indicators suggest a pick-up in industrial sector but a loss of momentum in services sector activity, pointing to an uncertain growth outlook for the second half of the fiscal year.

On the inflation front, the trajectory has been largely in line with expectations. Consumer Price Index (CPI) inflation eased from 6.2% in October 2024 to 5.2% in December 2024, primarily due to a moderation in food prices. January’s inflation print is expected to decline further to 4.8%, although the data will only be released post the MPC meeting. Nonetheless, with the INR on a steady decline imported inflation cannot be ruled out entirely.

Budget FY26: A Growth-Oriented Fiscal Stance

The recently announced budget balances fiscal prudence with growth support. While sticking to the committed fiscal deficit reduction path, it provides a significant boost to consumption. The INR 1tn revenue loss from personal income tax relief is expected to bolster urban consumption, which has lagged in recent quarters. Simultaneously, the INR 11.2tn capital expenditure will continue to support public investment. However, the push from the government is majorly from a consumption driving perspective.

With inflation moderating and the budget delivering a pro-consumption push, the case for monetary easing strengthens. The RBI will now be expected to support investment growth.

External Factors: INR Under Pressure, Fed Uncertainty Looms

The INR hit a fresh all-time low against the US dollar this week, following new tariff announcements by the US targeting Mexico, Canada, and China. This adds another layer of complexity to the RBI’s decision. A weaker INR, if not managed carefully, could stoke imported inflation, particularly in commodities. Given that the US Federal Reserve has dialled back expectations of aggressive rate cuts in 2025, emerging market currencies, including the INR, could remain under pressure.

MPC’s Likely Stance: A Close Call

Despite these external concerns, delaying rate cuts could come at the cost of growth. Monetary policy operates with lags, and an earlier start to easing—such as a 25-basis-point cut in February followed by another in April—would support demand recovery in FY2026. Lower borrowing costs, combined with budgetary tax relief and softer inflation, would enhance household purchasing power and boost private consumption. Moreover, a rate cut, along with a well-calibrated borrowing program for FY2026, could help lower corporate bond yields, improving financing conditions for businesses.

The upcoming decision is finely balanced. On one hand, the slowing growth momentum makes a strong case for monetary easing. On the other, still-elevated inflation, currency pressures and external uncertainties could persuade the RBI to wait a little longer before cutting rates. In our view, the RBI will opt for a rate cut to support growth. We anticipate a 25bps cut this week, followed by another in April.