The Reserve Bank of India (RBI) recently released the Monetary Policy Committee (MPC) minutes, revealing a unanimous decision to reduce the repo rate by 25 basis points (bps) to 6.25%, signaling a cautious yet optimistic stance toward economic growth. This rate cut, marking the first reduction in five years, was made with the aim of supporting economic recovery amid the evolving inflation landscape.

Key Insights from RBI MPC Minutes

The RBI Governor Sanjay Malhotra, in his first monetary policy meeting as governor, stated that India’s inflation trajectory is moving closer to the central bank’s target of 4%, which has made the rate cut necessary. As inflationary pressures ease, particularly in food prices, policy easing is seen as an appropriate step. However, the global trade uncertainties, the risk of adverse weather events, and global financial market volatility remain substantial concerns for the growth outlook.

1. Monetary Policy Response to Inflation

RBI Governor Malhotra stressed that macroeconomic conditions now justify the lower repo rate, given that inflation is expected to align with the central bank’s medium-term target. The central bank’s proactive approach stems from concerns that an overly restrictive monetary policy could harm economic momentum. He highlighted that the Union Budget's fiscal consolidation measures and agriculture proposals are positive for price stability and will help anchor inflation expectations in the coming years.

Malhotra also noted that easing monetary policy, combined with strong agricultural growth and growth-supportive fiscal measures, would contribute to higher household consumption and investment in sectors like housing and capital expenditure, thus supporting overall demand.

2. Inflation Outlook and Growth Risks

RBI members concurred that retail inflation has eased to a five-month low of 4.31% in January, with the decline driven mainly by a drop in food price inflation. The committee expressed cautious optimism regarding the food inflation outlook, which is expected to turn decisively positive. However, some members, like Saugata Bhattacharya, warned that the repo rate might soon become too restrictive, potentially undermining growth prospects.

While inflation seems to be on a downward trajectory, the MPC remains vigilant of the risks to economic growth posed by continued global uncertainties, especially trade policies and global financial conditions.

3. Greater Focus on Growth

The RBI also emphasized that there is now more room to address concerns regarding growth as inflationary pressures ease. Deputy Governor M. Rajeshwar Rao pointed out that with inflation aligning with the central bank’s target, there is an opportunity to use monetary policy to stimulate growth, particularly with measures like liquidity injection.

The RBI also acknowledged the need to maintain high growth momentum over the medium term. The MPC suggested that reducing interest rates could stimulate aggregate demand, fostering higher consumption and investment. The fiscal measures introduced in the Union Budget would further support these efforts by boosting household income and corporate investment.

4. Challenges and Concerns Over Global Economic Environment

Despite a generally positive domestic outlook, the RBI expressed concerns over the threats from global economic developments. Nagesh Kumar, an external member of the MPC, flagged the growing concern over foreign direct investment (FDI) inflows, which have been subdued recently. He noted that FDI and foreign portfolio investments (FPIs) have been repatriating funds, which could signal a decline in global confidence in India’s economic outlook.

Kumar also pointed to the increasing risk of dumping from China, where excess capacities might flood Indian markets, especially in sectors like steel, which could undermine domestic manufacturing growth. He expressed concern over global trade tensions and emphasized that India’s growth agenda should not be sidelined due to global uncertainties.

5. Economic Growth and Inflation Forecasts

For 2025-26, the RBI MPC projected real GDP growth at 6.7%, slightly improving from the previous forecast of 6.6%. The GDP growth expectations for the first quarter of 2025-26 are pegged at 6.7%, with the second quarter expected to rise to 7%, before cooling to 6.5% in the second half of the year.

The consumer price index (CPI)-based inflation is projected at 4.8% for the fiscal year 2024-25, with a slight dip to 4.4% in Q4 of FY25. For FY26, the inflation forecast is pegged at 4.2%, with expectations of a modest decline in the first half of the year.

Conclusion: Monetary Policy Outlook

The RBI MPC has signaled that its focus is shifting toward stimulating economic growth, with an eye on inflation control as well. The 25bps rate cut reflects a balance between fostering growth while keeping inflation within target limits.

The RBI's emphasis on growth-friendly monetary policy comes at a time when global trade tensions, FDI concerns, and domestic challenges could impact India's recovery trajectory. As the next MPC meeting is scheduled for April 2025, the central bank will continue to monitor both domestic and global developments to calibrate its policy response.

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