Concerns over growth, easing inflation allow RBI to cut rates, show MPC minutes

Concerns over growth, easing inflation allow RBI to cut rates, show MPC minutes

The members of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) said concerns over India's economic growth and easing inflation trajectory made a room for the central bank to cut rates, showed February policy minutes.

"There has been a shift in the domestic growth inflation balance since the December 2024 policy – while the inflation registered sequential softening, growth outcomes were weaker. Heightening uncertainties, emanating from the global financial markets and trade policies too cloud the outlook for domestic growth and inflation," said RBI deputy governor M Rajeshwar Rao.

Further, RBI governor Sanjay Malhotra said that given the macroeconomic outlook when inflation is expected to align with the target, and recognising that monetary policy is forward-looking, he views a lower policy rate to be more appropriate at the current juncture.

The central bank in February monetary policy cut repo rate by 25 basis points (bps) to 6.25 percent, while the rates for the Standing Deposit Facility, Marginal Standing Facility, and bank rates remained at 6.5 percent.

The RBI has increased the repo rate by 250 basis points between May 2022 and February 2023. Since April 2023, the repo rate has been steady at 6.5 percent, in order to keep a check on the inflation to bring it to the medium-term target of 4 percent.

The central bank projects a real GDP growth of 6.7 percent for FY26.

Prior to this, Economic Survey 2025 estimated a real GDP growth of 6.4 percent in FY25, 20 bps lower than the projection by the RBI in its December monetary policy.

The Survey also highlighted that the country's real GDP growth is expected to grow at 6.3-6.8 percent in FY26, signaling "moderate prospects buffeted by multiple headwinds, including a looming global trade war and artificial intelligence (AI)-induced disruptions".

RBI MPC external member, Ram Singh, said given the demand boost from Budget 2025, a rate cut powered by a commensurate increase in liquidity will decrease the risk premium demanded by investors, thereby boosting private investment to support growth.

"By reducing the cost of capital, the rate cut can increase the commercial viability of the public-private partnership schemes for warehouses, cold storage, and infrastructure logistics. By reducing the wastage of fruits and vegetables (the significant causes of inflation), such investments can help induce a virtuous cycle of faster growth and lower inflation," Singh added.

The GDP growth projection is being keenly watched after the slowdown in the economy led to a sluggish second quarter of the current financial year and a lower first advanced estimates.

The country's GDP growth declined to a 7-quarter low of 5.4 percent in July-September period of current financial year 2024-25, as against RBI's own projection of 7 percent.