Challenges of a Rate Cut from RBI – February 2025

India is embarking on the new year with many aspirations and a change in terms of the trajectory of the prospects of growth. Despite the challenges of last year, in terms of high inflation, high unemployment rate, and falling domestic currency value against the dollar- 2025 will be a task for the central bank governor as well as for the central government to tackle more amicably. The new governor Sanjay Malhotra, will have a task if it were to go in for a rate cut to stimulate the economy. However, there are multiple challenges ahead.

The United States of America is said to have seen a strong growth since last year and it is said to continue to do so with the election of their new president as well. With their strong US dollar, the plummeting Indian rupee and elevated inflation levels could dampen the prospects of a rate cut. This could also affect the imports as it is probable to be costlier going forward since the Rupee is said to have lost close to three percent value against the U.S. dollar. It is most likely to add a lot of pressure in terms of the inflationary pressure as well.

The equity and the bond market has seen a massive hit, due to the high volatility of the Indian rupee, making many foreign investors backing off from investing more in India. If this is likely to continue it would hurt the growth prospects envisioned for this year.

With the Rupee going as low as 87.00 against the U.S. dollar, the pressure on the RBI to make a decision appropriate for the situation is rising. Retail inflation, which is said to have cooled down to 5.22 percent, as per December estimates, is a good sign for the economy, as prices of most commodities show some signs of falling to normalcy.

Considering the mixed conditions of falling currency and inflation cooling, it is highly anticipated that the new governor and its members will decide in the February meeting. High anticipation of a rate cut of at least 25 bps is expected by most economists and analysts- to support growth and FII equity markets. This would help India stay a strong contender for a resilient economy going into 2025, in the Asian subcontinent.