RBI’s MPC Cuts Lending Rate by 25 Basis Points to 6.25%
STORIES, ANALYSES, EXPERT VIEWS
At the end of the three-day meeting that started Wednesday, the Monetary Policy Committee (MPC) Friday decided unanimously to reduce the policy rate by 25 basis points to 6.25% from 6.5%. One basis point equals 0.01%. Consequently, the Standing Deposit Facility rate will be at 6%.
The RBI had last reduced the repo rate by 40 basis points to 4% in May 2020 to help the economy tide over the crisis following the outbreak of the Covid pandemic and subsequent lock down. But in May 2022 the central bank started a rate hike cycle in view of the Russia-Ukraine war and paused it only in May 2023.
Continue with a neutral stance: The MPC also decided unanimously to continue with a neutral stance and remain unambiguously focused on a durable alignment of the inflation target, while supporting growth.
The flexible inflation targeting framework has served the economy very well, especially in the pandemic-affected period, the new RBI Governor Malhotra said. “The interest of the economy demands financial stability and consumer protection and our mandate at the RBI is to ensure both of them,” he said.
On Inflation
Inflation has been declining and is expected to moderate in 2025-26 further, gradually aligning with the target (4%), the RBI Governor said. “At the same time, the MPC felt that excessive volatility in global financial markets and continued uncertainty about global trade policy along with adverse weather events, could pose risks to growth. That’s why the MPC has decided to retain its neutral stance,” he noted.
Headline price rise, “after moving above the upper tolerance band in October, has registered a sequential moderation in November and December. Going ahead, food inflation pressures, absence of any supply shocks, should ease due to a favourable ‘Rabi’ (winter crop harvested in spring or at the beginning of summer) crop prospects, he said.
Core inflation is expected to rise but remains moderate, he said. “But there are upside risks to the inflation trajectory. CPI inflation for this year is projected at 4.8%, with the current quarter at 4.4%. Assuming a normal monsoon, the inflation for 2025-26 is projected at 4.2% with the risks evenly balanced,” he added.
On GDP growth
Real GDP growth for this year is estimated at 6.4% by the NSO. Going forward, economic activity is expected to improve in the coming year, he added.
Agriculture activity remains upbeat, he said. Manufacturing is expected to revive gradually in the second half of this year and thereon. Early Q3 results indicate a mild recovery in manufacturing. Business expectations remain upbeat. Services activity continues to be resilient, though the Services PMI has declined, the Governor said.
Urban demand remains subdued. Going forward, improving employment conditions, tax relief in the Union Budget, moderating inflation will boost household consumption. Higher capacity utilisation levels, robust business expectations and government policy support should help investments, Mr. Malhotra said.
Challenge from global headwinds: Global headwinds pose uncertainty to the outlook with downward risks, the Governor noted. The RBI expects real GDP growth in the coming year at 6.7%, with the risks evenly balanced, he said.
Coming to the global economy, Malhotra said “the backdrop remains challenging and is growing below the historic average. Progress on global disinflation is falling, hindered by services prices pressures.” The U.S. Dollar has strengthened, the bond yields have hardened, and emerging markets have faced large outflows of capital, he said, saying there is an elevated uncertainty which has exacerbated volatility.
The Indian economy, though continuing to remain strong and resilient, also did not remain immune to these global challenges with the rupee coming under pressure, the Governor said.
Current account deficit
Malhotra said “India’s current account deficit moderated in Q2 of this year. According to the World Bank, India continues to remain the largest remittance recipient globally in 2024.” The CAD for this year is expected to remain well within the sustainable level. As of January 31, 2025, India’s foreign exchange reserves were at $630-plus billion dollars, which gives us an export cover of over 10 months. The RBI’s exchange rate policy has remained very consistent. Our interventions in the forex market focus on smoothening excessive and disruptive volatility, and does not target any level, he said.
Durable liquidity
After remaining in surplus till July 2024, system liquidity did turn into a deficit in December and January, he said. The RBI is committed to provide sufficient systemic liquidity, he added. “We will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity condition as may be required for the system. Not just overnight liquidity, but also durable liquidity to meet the requirements for the system,” the Governor noted.
