India is expected to cut interest rates for the first time in nearly five years on Friday, providing stimulus to its sluggish economy. The Monetary Policy Committee (MPC) is widely tipped to reduce the repo rate by 25 basis points to 6.25%, after having kept it unchanged for eleven straight meetings.
This would be the first rate cut since May 2020 and largely in line with analysts' expectations. India's government has forecast annual growth of 6.4% in the year ending in March, its slowest pace in four years and below the lower end of its initial projection, weighed by a weaker manufacturing sector and slower corporate investments.
The government last week announced tax cuts in its budget to boost spending and spur growth, while ensuring the fiscal deficit remains in check. Though inflation still remains well above the RBI's medium-term target of 4%, it eased to a four-month low of 5.22% in December and is seen gradually declining towards the target in the coming fiscal year barring unexpected supply shocks.
The MPC had changed its policy stance to neutral in October and cut banks' cash reserve ratio by 50 bps in December to ease liquidity stress in the banking system.