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RBI bites the bullet and cuts rate but red-flags global pressures on growth
- Reserve Bank of India Governor Sanjay Malhotra in his first policy announcement said the monetary policy committee unanimously decided to cut the repo rate by 25 bps to 6.25%—the central bank's first interest rate cut in nearly five years—but also delivered a warning.
Nearly five years since the last cut in the middle of a pandemic lockdown, the central bank on Friday lowered the benchmark repo rate, taking advantage of easing inflation to spur economic growth. The Reserve Bank of India’s six-member monetary policy committee (MPC) voted unanimously to cut the repo rate by 25 bps to 6.25% and maintain the policy stance at ‘neutral’.
In a relief for lenders, the central bank deferred two key regulations by a year -- one asking banks to set aside more of liquid assets to meet contingencies; and a draft rules on project finance. However, there were no fresh measures to augment liquidity, disappointing a section of market participants.
“Considering the existing growth-inflation dynamics, the MPC, while continuing with the neutral stance, felt that a less restrictive monetary policy is more appropriate at the current juncture. The MPC will take a decision in each of its future meetings based on a fresh assessment of the macroeconomic outlook,” RBI governor Sanjay Malhotra told reporters after announcing the rate decision.
The rupee strengthened by 15 paise to 87.43 against the US dollar, while the yield on 10-year government bonds rose 5 bps, and the Sensex closed nearly 200 points down.
In his first monetary policy review since taking charge in December, governor Malhotra said the MPC will continue to remain watchful, given the excessive volatility in global financial markets, uncertainties around global trade policies, and adverse weather events, which pose risks to India’s growth and inflation outlook.
The MPC also lowered the growth forecast for FY25 to 6.4% from 6.6%, pointing to potential risks from geopolitical tensions, protectionist trade policies, volatility in international commodity prices, and financial market uncertainties. In 2025-26, it expects India’s economic growth to marginally improve to 6.7%.
“The MPC also noted that though growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target,” said Malhotra.
While inflation has been a major concern affecting India’s growth prospects, chiefly because of rising food prices, it has been moderating recently, finally making room for a rate cut. India’s retail inflation cooled to a four-month low of 5.22% in December driven by easing food prices. The government expects the economy to expand 6.4% in FY25, the lowest in four years.
The rate-setting committee maintained its inflation forecast at 4.8% for this financial year, easing to 4.2% next year.
While noting a significant softening in food inflation going forward due to good kharif, or monsoon crop, production, the MPC expects core inflation to rise, albeit moderately. It also noted rising uncertainty in global financial markets, continuing volatility in energy prices, and adverse weather events as posing risks to India’s inflation trajectory.
Also read | Growth, inflation, financial stability: It’s a season of major trade-offs for India’s policymakers
“The MPC noted that inflation has declined. Supported by a favourable outlook on food and continuing transmission of past monetary policy actions, it is expected to further moderate in 2025-26, gradually aligning with the target,” said Malhotra.
RBI had previously cut its benchmark repo rate by 40 basis points to 4% in May 2020. Subsequently, it raised the interest rate seven times, taking it to 6.50%, which remained unchanged since February 2023 until now.
Next cut in April?
A rate cut, supported by a fiscally prudent Budget for 2025-26, was seen as essential to boosting economic growth, which has been slowing in recent quarters.
Economists and traders expect another rate cut in April. The Street, however, is divided over the extent of rate cuts required in the next fiscal year.
“Going ahead, we expect the rate cut cycle to remain shallow, with another 25-50 bps rate cuts likely as we see downside risks to RBI’s GDP growth of 6.7% in FY2026,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.
“The timing and magnitude of rate cuts will depend on uncertainties related to US administration’s economic and trade policies, higher-for-longer rates in the US, and domestic inflation risks,” Bhardwaj added.
Nomura, on the other hand, expects a deeper rate cut cycle of 75 basis points over the year.
Since December, RBI had been injecting massive liquidity into the banking system through various tools, setting the stage for a rate cut. However, Malhotra noted that some banks were reluctant to lend in the call money market and were passively parking funds with the central bank.
Urging lenders to actively trade in the uncollateralized call money market for better transmission, Malhotra assured that RBI would take pro-active measures to ensure sufficient durable liquidity in the system.
Call money market is a short-term money market that allows for large financial institutions to borrow and lend money at interbank rates.
“RBI is committed to provide sufficiency system liquidity. We will continue to monitor financial market conditions and proactively take appropriate measures to ensure orderly liquidity (durable) conditions for the system,” Malhotra said.
While the market may have taken comfort from RBI’s assurance on liquidity, it is expecting further measures to increase durable liquidity in the system.
“Our estimates indicate that the cumulative measures undertaken thus far may still fall short of making core liquidity turn positive, given ongoing seasonal currency in circulation increases as well as continued dollar sales by RBI,” said Suyash Choudhary, head–fixed income, Bandhan AMC.
“However, from next quarter, as the credit ‘lean’ season begins and core liquidity improves further, including from an expected hefty RBI dividend, the transmission process can commence in a more broad-based fashion,” he added. “Drawing from this scenario, we will look for RBI announcing new ‘liquidity-bridging’ measures between now and May.”
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Business NewsEconomyRBI bites the bullet and cuts rate but red-flags global pressures on growth
First Published:7 Feb 2025, 10:10 AM IST
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