The MPC’s decision to lower rates comes after the government cut personal income taxes in the Union budget, a measure that is expected to boost household consumption, providing a fillip to the broader economy.
Feb 7, 2025 18:36 IST First published on: Feb 7, 2025 at 18:36 IST
On Friday, the RBI’s monetary policy committee cut interest rates by 25 basis points, joining the list of central banks across the world who have moved to ease rates. The benchmark repo rate stands at 6.25 per cent. The decision of the committee — this was the first time the MPC had met under the new RBI governor, Sanjay Malhotra — was unanimous. Alongside, the committee voted to continue with the neutral policy stance. The MPC’s decision to adopt a less restrictive policy clearly indicates that growth considerations now outweigh concerns over inflation.
The momentum in the economy dipped sharply in the second quarter, with GDP growth coming in at 5.4 per cent. The first advance estimates have pegged growth at 6.4 per cent for the full year. However, the pick-up in the second half of the year does not seem to be robust. The RBI has noted “early corporate results for Q3 indicate a mild recovery in the manufacturing sector.” Greater clarity will emerge in the coming weeks and months. The central bank now expects the economy to grow at 6.7 per cent in 2025-26 — this is at the higher end of the Economic Survey’s projections which had pegged growth to range between 6.3 to 6.8 per cent. Inflation, however, is now less of a concern with subdued core inflation and food prices expected to moderate. As per the RBI’s latest projections, the consumer price index is projected to come down from 4.8 per cent this year to 4.2 per cent next year. It says that food prices should witness softening due to “good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects”. The decision to cut rates comes only days after the central bank announced its plan to inject liquidity into the banking system through open market operations, variable rate repo auctions and dollar/rupee buy/sell swap auctions. In his comments, the RBI Governor said that the central bank would continue to monitor liquidity and financial market predicaments, and “take appropriate measures to ensure orderly liquidity conditions”. As per analysts, this should allow for “smoother transmission of rate cuts in the money market”.
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The MPC’s decision to lower rates comes after the government cut personal income taxes in the Union budget, a measure that is expected to boost household consumption, providing a fillip to the broader economy. The question, now, is: To what extent can the central bank ease policy rates further to support growth? Its inflation projections — 4 per cent in the second quarter, 3.8 per cent in the third quarter and 4.2 per cent in the fourth quarter — suggest the space for further easing. But the global and domestic environment is challenging. In an uncertain environment, the pressure on the currency is also unlikely to ease. Much will depend on the playing out of the growth-inflation dynamic.
