Reserve Bank of India's Monetary Policy and Economic Outlook

Repo Rate Cut and Inflation Outlook

• The Reserve Bank of India's (RBI) monetary policy committee (MPC), led by Governor Sanjay Malhotra, reduced the repo rate by 25 basis points to 6.25% in February.
• This decision was influenced by inflation aligning with the target, with the RBI projecting consumer price index (CPI) inflation at 4.2% for Q4 of FY 2025-26.
• Food inflation is expected to decrease due to robust kharif harvests, winter vegetable price corrections, and promising rabi crop projections.

Economic Growth and Policy Measures

• Malhotra emphasized that farm sector growth and budgetary measures would boost demand, although global financial uncertainties and adverse weather pose challenges.
• Deputy Governor M Rajeshwar Rao noted liquidity measures aiding monetary transmission.
• Commitment to fiscal consolidation is expected to anchor medium-term inflation expectations.

Monetary Policy Approach

• Internal member Rajiv Ranjan mentioned a subtle change in October 2024 policy wording, indicating increased flexibility for rate cuts.
• External member Ram Singh highlighted that low core inflation supports the case for rate cuts amidst expectations of moderated food price inflation.

Economic Growth Concerns

• Singh pointed out subdued private consumption due to low real wage growth and high interest rates affecting credit growth.
• Bank credit growth rate fell from 15.6% in December 2023 to 12.4% in December 2024, pressuring demand growth.

Outlook on Inflation and Growth

• Internal member Saugata Bhattacharya expressed cautious optimism about the downward inflation trajectory, suggesting that the current policy might become too restrictive.
• External member Nagesh Kumar advocated for a rate cut to support economic growth, especially in the manufacturing sector, and suggested a potential 50 bps cut once global uncertainties stabilize.