The Reserve Bank of India (RBI) led Monetary Policy Committee on Friday decreased the repo rate by 25 basis points to 6.25% for the first time in nearly five years, maintaining the ‘neutral’ stance in its February policy, as the monetary authority seeks to support growth as inflationary pressure has started easing and is expected to align with the RBI’s target of 4%.
“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. 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 RBI Governor Sanjay Malhotra.
Consequently, the Standing Deposit Facility (SDF) rate will be 6.00% and Marginal Standing Facility (MSF) and Bank rate will be 6.50%.
In Governor Malhotra’s maiden MPC meeting, all six members of the RBI-led Monetary Policy Committee (MPC) voted for decreasing the repo rate by 25 basis points and continuing the ‘neutral’ stance.
The Governor highlighted that the inflation rate has been majorly within the central bank’s tolerance of 2% to 6% except a few occasions of registering above the 6% mark. Meanwhile, the fall in global inflation rate has been stalling, likely due to rising services price inflation. On the other hand, growth of the Indian economy has been comparatively lower due to several macro-economic factors and global trade policies.
Due to decreasing likelihood of interest rate cuts in the US, the US dollar has seen an uptrend, pulling capital away from the Emerging Market Economies (EMEs), leading to a depreciation of their currencies, such as in the Indian rupee. In this situation, financial stability and consumer protection take precedence, spurring the MPC into initiating rate cuts.
Elaborating on the domestic economy, the governor highlighted that the first advance estimates indicate real GDP growth of 6.4% for the current year (FY25), significantly lower than the 8.2% growth witnessed last year. Agricultural activity remains robust due to sufficient water-levels in the reservoirs and prospects of good rabi crops. The manufacturing sector is projected to see expansion in the second half of this year, as signalled by early corporate results for Q3FY25. Mining and electricity are also seeing a pick-up post the monsoon season.
Rural demand continues to grow while urban demand is sliding lower. The combination of expected improvement in the employment scenario, the tax relief announced by the Finance Minister in the Union Budget, and the downward trend in inflation, household consumption may see an uptick.
Keeping all this in view, the real GDP growth is projected to be 6.7% for FY26 with Q1 at 6.7%, Q2 at 7%, Q3 at 6.5% and Q4 at 6.5%.
On the inflation front, the governor expects that food inflation pressure will soften, barring any supply-side shocks. Core inflation may see some moderate increase. Increasing uncertainty in global financial markets, along with ongoing volatility in energy prices and negative weather events, poses upward risks to the inflation outlook.
“Assuming a normal monsoon, CPI inflation for the financial year 2025-26 is projected at 4.2 per cent with Q1 at 4.5 per cent; Q2 at 4.0 per cent; Q3 at 3.8 per cent; and Q4 at 4.2 per cent. The risks are evenly balanced,” added Governor Malhotra.
The Current Account Deficit (CAD) was seen easing to 1.2% of GDP this year from 1.3% of GDP last year. The country’s foreign exchange reserves were $630.6 billion as on January 31, 2025, indicating an import cover of over 10 months.
System liquidity, which had been in surplus from July to November 2024, shifted into deficit during December 2024 and January 2025. This liquidity drain was primarily driven by factors such as advance tax payments in December, capital outflows, forex operations, and a significant increase in currency circulation in January.
Despite these challenges, the Reserve Bank has noted that some banks are hesitant to lend in the uncollateralized call money market, opting instead to park funds with the Reserve Bank. The central bank has urged financial institutions to engage more actively in the call money market to enhance its depth and vibrancy. The Reserve Bank remains committed to ensuring adequate liquidity and will continue to monitor market conditions, taking proactive measures as needed.
The RBI's Monetary Policy Committee, under new Governor Sanjay Malhotra, cut the repo rate by 25 basis points to 6.25% in February - its first rate cut in two years - while maintaining a 'neutral' stance. This decision, unanimously supported by all six MPC members, comes as inflation is expected to moderate to 4.2% in FY25-26 and GDP growth is projected at 6.7% for FY26, down from 8.2% last year. The rate cut aims to support growth while managing inflation, with the central bank noting that system liquidity has shifted from surplus to deficit in recent months.
The minutes of the MPC’s meeting will be published on February 21, 2025. Also, the next meeting of the MPC is scheduled for April 7-9, 2025.
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