RBI MPC meet: Repo rate cut by 25 basis points to 6.25%

The Reserve Bank of India’s monetary policy committee (MPC) today unanimously slashed the repo rate by 25 basis points to 6.25% after keeping the key policy rate unchanged at eleven consecutive meetings. The MPC also decided unanimously to continue with the 'neutral' policy stance.

Following today's rate cut, the first in nearly five years, the standing deposit facility (SDF) rate stands adjusted to 6% and the marginal standing facility (MSF) rate and the bank rate to 6.5%.

This is the first monetary policy statement of the new RBI governor Sanjay Malhotra, who took over from Shaktikanta Das in December last year. A 1990 batch IAS officer, Malhotra earlier served as Revenue Secretary.

The repo rate cut comes after growing demand of lower interest rates from several ministers. Finance Minister Nirmala Sitharaman advocated for “far more affordable” interest rates, while Minister of Commerce and Industry Piyush Goyal called for a repo rate cut, dismissing the practice of tying policy rate decisions to food inflation as unfounded.

The MPC under the new RBI governor will have to walk a tightrope between taming inflation and boosting economic growth. India’s GDP growth in Q2 FY25 slipped to seven-quarter low of 5.4%.

The rate cut also comes after Finance Minister Sitharaman announced exemptions and reductions in personal income tax for taxpayers under the new tax regime in order to spur consumption.

The RBI governor in his address says the Indian economy is not immune to global uncertainties, adding that the Indian rupee has come under pressure of late. Emerging market economies have witnessed capital outflows, leading to sharp depreciation of their currencies, says Malhotra.

India's real gross domestic product (GDP) is estimated to grow at 6.4% in 2024-25 supported by a recovery in private consumption. On the supply side, growth is supported by the services sector and a recovery in agriculture sector, while tepid industrial growth is a drag, says the monetary policy statement. Looking ahead, healthy rabi prospects and an expected recovery in industrial activity should support economic growth in 2025-26, it says. "Among the key drivers on the demand side, household consumption is expected to remain robust aided by the tax relief in the Union Budget 2025-26," the MPC says.

"However, headwinds from geo-political tensions, protectionist trade policies, volatility in international commodity prices and financial market uncertainties, continue to pose downside risks to the outlook," the MPC cautions. Taking these factors into consideration, the MPC forecasts real GDP growth for 2025-26 at 6.7% with Q1 at 6.7%; Q2 at 7%; and Q3 and Q4 at 6.5% each.

RBI's MPC forecasts CPI inflation for 2024-25 is at 4.8% with Q4 at 4.4%. Assuming a normal monsoon next year, CPI inflation for 2025-26 is projected at 4.2%.

Speaking about the Flexible Inflation Targeting Framework which was put into place in 2016, Malhotra says it has served the Indian economy very well over the years. “Average inflation has been lower. CPI has mostly stay aligned with the framework barring a few exceptions. We will strive to further refine the building blocks of this framework,” he says. Retail inflation eased to a four-month low of 5.22% in December as compared to 5.48% in the previous month, aided by moderation in food prices.

India's gross domestic product (GDP) growth for the financial year 2025-26 is estimated to be in the range of 6.3-6.8%, according to the Economic Survey 2024-25 tabled in Parliament last month.

RBI’s MPC had changed the policy stance from ‘withdrawal of accommodation’ to ‘neutral’ in October. The change in stance provides flexibility to the MPC while enabling it to monitor the progress on disinflation which is still incomplete.