MPC Minutes signal rate cut season

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has voted for a 25 basis points (bps) cut in the policy repo rate while retaining a neutral stance, as revealed in the minutes of the latest policy meeting. The decision reflects a growing confidence in the disinflation trajectory and the need to support economic growth amidst rising global uncertainties.

MPC member Dr. Rajiv Ranjan highlighted that while inflation was initially expected to decline in mid-2024, unexpected price shocks in September and October delayed any policy shift. However, with inflation now projected to average 4.2% in FY 2025-26 and global commodity prices remaining stable, the committee felt conditions were ripe for easing. “A policy rate cut in February 2025 is the most rational and appropriate next step,” he stated, emphasizing that the infusion of liquidity in recent months had set the stage for better transmission of monetary policy.

Deputy Governor M. Rajeshwar Rao echoed these views, noting that growth in FY 2024-25 had fallen short of expectations, coming in at 6.4%. Weak capital formation and external uncertainties were key concerns, even as private consumption showed signs of resilience. Given the benign inflation outlook, which is heavily influenced by food prices, Rao supported the rate cut, stating that “there is greater space to address concerns regarding growth.” He also pointed to the fiscal measures in the Union Budget that, alongside monetary easing, could stimulate aggregate demand.

RBI Governor Sanjay Malhotra underscored the need to preserve economic momentum while maintaining price stability. While inflation had moderated after breaching the upper tolerance band in October 2024, he noted that food prices were expected to decline further due to strong kharif and rabi harvests. “Given the macroeconomic outlook, when inflation is expected to align with the target, I view a lower policy rate to be more appropriate,” he said.

However, Malhotra cautioned against complacency, pointing to global financial market volatility and the risk of adverse weather events. He emphasized that the MPC must remain watchful of these evolving risks and hence, opted to retain the neutral stance. “This will provide the flexibility to respond to the evolving macroeconomic environment,” he noted.

Despite the rate cut, the MPC chose to retain its neutral stance to ensure flexibility in responding to evolving macroeconomic conditions. Dr. Ranjan noted that the shift in stance from “withdrawal of accommodation” to “neutral” in October 2024 had provided room for future policy actions.

The minutes also acknowledged global economic uncertainties, including trade fragmentation and geopolitical risks, which have led to a hesitant and uneven monetary easing cycle worldwide. Members emphasized the importance of a coordinated fiscal and monetary policy approach to support growth while ensuring price stability.

With India’s GDP growth projected to rebound to 6.7% in FY 2025-26 and inflation expected to remain within the target range, the RBI’s policy direction is likely to remain data-dependent. The MPC’s decision signals a cautious yet proactive approach to nurturing economic recovery while staying vigilant against inflationary risks.

The next policy meeting will provide further insights into how the central bank navigates the challenges of sustaining growth amid external uncertainties.