Economists Forecast 5.75% Repo Rate by Mid-2025 Amid Growth Concerns:

India's Reserve Bank, according to the economists, is set to lower repo rates by 25 to 50 basis points out of concern of rate lowering towards growth. Furthermore, they noted that the balance central bank is required to announce should be larger liquidity measures because of the expected persistent liquidity tightening. Emkay Global Financial Services Chief Economist Madhavi Arora stated, “Going forward, we expect a shallow rate cut cycle - 25-50 bps - along with additional measures towards easing liquidity.” According to Kotak Research there is also an expected further rate cut of 25-50 bps in FY26 as long as the inflation are reached at 4 % with no supply shocks and as long the RBI is accepting a higher level of Indian rupee weakness. After the fears posed by the MPC members during the policy set during the February minutes saw concerns in the gradual reduction of the inflation rate scheduled, the expectation surrounding the cut are tighter. Escalating uncertainties from global finances and trade policies too blur the outlook for domestic economic growth and inflation which makes it tougher for the Indian Monetary Policy Committee to decide. “There has been a shift in the domestic growth inflation balance since there was a sequential softening which grew more active in the later months of 2024,” noted M Rajeshwar Rao the deputy governor of RBI.

Sanjay Malhotra, the RBI governor, stated that since monetary policy is always projected ahead of time, it seems more suitable to adopt a lower policy rate. This is in consideration of when inflation is projected to meet the targets and the current macroeconomic policies.

In February, the central bank changed the monetary policy and cut the repo rate by 25bps which brought the percentage down to 6.25%. The other rates for the standing deposit facility, marginal standing facility, and bank rates were left unchanged at 6.25%.

Between May of 2022 and February of 2023, the increase in the repo rates was 250 basis points. To control inflation at the mid-term target of 4%, the repo rate has been steady at 6.5% since April of 2023.

The central bank expects GDP to grow by 6.7% for FY26.

Before this, The Economic Survey 2025 anticipated a growth in real GDP of 6.4% for FY25, which is 20bps less than what the RBI expected in December's monetary policy.

The Survey also pointed out that real GDP growth for the country is projected to range between 6.3-6.8 percent for FY26 which indicates “moderate prospects buffeted by multiple headwinds, including a looming global trade war and artificial intelligence (AI) induced disruptions”.

According to Kotak report, MPC members have indicated an easing stance on monetary policy which is anticipated to provide continuity to growth alongside the fiscal measures in the FY2026Union budget.

The external members observed the consequent reduction in the RBI’s growth forecast for FY2025. Nagesh Kumar commented that, “the moderation in urban consumption affecting demand for durable goods coupled with sluggish private investment is causing the weakness in the manufacturing sector.” Ram Singh argued that a subdued growth in real wages has caused a slowdown in private consumption spending.

In his comments on the report, Saugata Bhattacharya has pointed out that interest costs should be lowered for small enterprises.

Additionally, economists have stated that liquidity which has remained in focus for the past two months shall receive support in the coming days notwithstanding the assistance to the markets by the RBI.

The monetary authority has recently declared a number of actions intended to boost liquidity using measures like daily variable rate repo (VRR), open market operations (OMO) purchases of government securities, and the USD/INR buy/sell swap auction.

Even with this, the liquidity position still remains largely negative, currently standing at a deficit of about Rs 2.34 lakh crore.