Concerns over growth slowdown, especially emanating from the manufacturing sector, and optimism around the gradually receding retail inflationary pressures prompted the Reserve Bank of India (RBI’s) six-member monetary policy committee (MPC) to unanimously go for a 25 basis point repo rate cut, per the minutes of the meeting released on Friday.
Besides unanimously voting for repo rate cut from 6.50 per cent to 6.25 per cent (the first revision in the rate after it was kept unchanged for two years) with effect from February 7, the members also voted to continue with the neutral monetary policy stance and remain unambiguously focussed on a durable alignment of inflation with the target, while supporting growth.
Further, the members flagged global uncertainties, including trade policies and persistent geopolitical tensions.
Food inflation
Governor Sanjay Malhotra observed that the food inflation outlook is turning decisively positive. Moreover, the budget proposals on agriculture and the commitment to fiscal consolidation, among others, are positive for price stability and would help to anchor inflation expectations over the medium term.
“The real GDP growth for the current year is estimated at 6.4 per cent, a softer expansion after a robust 8.2 per cent growth last year.
“…Given the macroeconomic outlook when inflation is expected to align with the target, and recognising that monetary policy is forward-looking, I view a lower policy rate to be more appropriate at the current juncture,” he said.
Malhotra emphasised that monetary policy easing, coupled with good agricultural sector growth and various growth supportive measures in the Budget, would boost household consumption, investment in housing, capital expenditure, etc thereby strengthening the pick-up in aggregate demand.
M Rajeshwar Rao, Deputy Governor, noted that at the current juncture, with a further alignment of headline inflation towards the 4 per cent target, there is greater space to address concerns regarding growth by way of reduction in the policy repo rate.
“This monetary policy measure in conjunction with the fiscal measures announced in the Budget should give a fillip to aggregate demand conditions.
“…The liquidity measures – Cash Reserve Ratio reduction in December 2024 as well as a slew of other measures taken in January 2025 to meet the durable liquidity requirements of the banking system, have created conditions conducive to help in transmission of the rate cut,” Rao said.
Sequencing path
Rajiv Ranjan, Executive Director, said in line with the sequencing path that MPC followed, a policy rate cut in February 2025 is the most rational and appropriate next step as it now has greater confidence on the disinflation path.
Referring to growth slow down concerns becoming more evident, he emphasised that India’s forte is its immense growth opportunities and strong macroeconomic fundamentals.
“There is a need to preserve the high growth momentum over the medium term, necessitating monetary policy to be sensitive to the evolving growth scenario and use various policy instruments including liquidity injection to reinvigorate growth,” Ranjan said.
External members views
Nagesh Kumar, Director & Chief Executive, Institute for Studies in Industrial Development, New Delhi, said, “Considering the seriousness of the growth slowdown and the elbow room provided by moderating the inflationary outlook, I strongly feel that the MPC should begin the process of normalisation of the monetary policy with a rate cut.”
“We could be more ambitious and target a 50 basis point cut. It would send a signal to the markets and private investors within and outside the country that India is serious and would do whatever it takes to revive economic growth momentum.”
However, given the global uncertainties, for the present policy, he voted for a 25 basis point cut in the repo rate.
Per Economist Saugata Bhattacharya all things considered, he is now cautiously optimistic about the downward trajectory of inflation.
He believes that, at this point, the required policy response on the inflation – growth trade-off – even factoring in significant margins of error from emerging risks – seems skewed in favour of the latter.
“Given the forecast inflation trajectory, the policy repo rate might soon, if not even as of now, become excessively restrictive, thereby increasing the risk of cumulatively damaging growth impulses,” he said.
Ram Singh, Director, Delhi School of Economics, assessed that subdued private consumption due to a low growth rate of real wages is a factor behind the slowdown.
However, excessively contractionary monetary policy has aggravated the problem. High interest rates and regulatory tightening have brought down the credit growth rate.
“The Budget has given a push to demand. However, demand push will not result in higher private capex unless interest rates are reduced immediately. The difference between the core inflation, excluding gold and silver (
“This means the capex-relevant real interest rate is significantly greater than the growth-neutral real interest rate…Very high effective real interest rates for capital goods are a drag on private capex and a leading factor why the investment rates remain below what is needed for a high growth rate,” Singh said.