In many respects, India’s Monetary Policy Committee (MPC) meeting on February 7 stood out from earlier ones. It was the first meeting after Governor Sanjay Malhotra assumed charge at Reserve Bank of India (RBI). Four of MPC’s five other members were also replaced between October 2024 and February 2025 as their terms ended. In the meeting, the MPC voted unanimously to reduce policy rates by 25 basis points after being on hold for two years. The minutes of this meeting, released this week, were therefore eagerly awaited by economy watchers to gauge the views of the reconstituted MPC and likely direction of rates.
They suggest a significant shift in the MPC’s stance. The three non-RBI members dwelt at length on the economy, noting that the CSO’s GDP growth estimate of 6.4 per cent for FY25 was significantly lower than the MPC’s October projection of 7.2 per cent. They attributed the slowdown to low growth in real wages affecting consumption, moderating urban demand impacting manufacturing activity and sluggish private capex. Two MPC members, in fact, said that restrictive monetary policy was keeping real rates too high, impeding credit demand and private capex. The MPC also agreed that without rate cuts, rising global protectionism could lead to an extended global slump, putting India’s manufacturing growth at further risk. Such a debate is to be welcomed, given that the Committee in its earlier meetings had barely taken note of its GDP projections going awry, and chose to take a sanguine view on growth.
On inflation, the MPC has turned distinctly dovish. Noting that the December CPI had cooled off to 5.2 per cent with core inflation at 3.7 per cent, most members argued for the need to ‘look through’ volatile food prices. One even went so far as to say that repo rate actions had had no impact on food prices in the last decade. The MPC took note of recent Household Consumption Expenditure Surveys (HCES), to surmise that the household spending on food was likely much lower than assumed in CPI. This underlines the need for the Centre to revise the CPI base year, which is 2011-12. But the Committee seemed to carry its optimism about inflation a little too far, in predicting that core inflation would remain subdued despite Trump tariffs and geopolitical risks.
One of the oft-cited challenges to India cutting rates at this point, is the risk of capital flight. MPC members had interesting counter arguments to offer. One, they said, capital flows into India are driven more by its ‘distinctive growth’ story than by rate differentials, which makes growth a priority. Two, India attracted copious capital inflows between 2020 and 2024 despite shrinking India-US rate differentials. Three, the Rupee depreciation that follows rate cuts can stimulate exports and aid economic growth. This multi-faceted debate suggests that though it is tasked with inflation-targeting, the MPC cannot discharge its mandate effectively without balancing inflation, growth and exchange rate considerations.