The RBI's Monetary Policy Committee meets in early February, and markets are increasingly hopeful of a rate cut. With CPI inflation trending towards 4.5% and growth showing signs of moderation, the case for easing is building. Here's our analysis.
Current Macro Picture
- CPI inflation: 4.7% in December (down from 5.5% in September)
- Core inflation: 4.2%, within RBI's comfort zone
- GDP growth: Q2 FY26 at 5.6%, below expectations
- Repo rate: 6.5% (unchanged since February 2023)
Arguments for a Rate Cut
The RBI has held rates steady for nearly two years, waiting for inflation to durably anchor at 4%. With food prices moderating and core inflation benign, the inflation argument for high rates is weakening. Growth concerns add urgency—Q2 GDP was a disappointment.
Arguments Against
The RBI may prefer to wait for more clarity on the Fed's path to avoid rupee pressure. Vegetable prices remain volatile, and El Niño effects on the summer crop are uncertain. A cautious RBI might opt for a stance change rather than an outright cut.
Our View
We assign a 60% probability to a 25 bps rate cut in February. Even if the RBI holds rates, we expect a stance change to "neutral" or "accommodative." The April meeting is a near-certainty for a cut if February doesn't deliver.
Market Impact
A rate cut would be positive for rate-sensitive sectors—banks, NBFCs, real estate, and auto. Bond yields would fall, benefiting duration portfolios. We recommend increasing exposure to quality NBFCs and housing finance companies ahead of the MPC.