RBI Rate Cut: External Factors May Shape MPC's Upcoming Monetary Policy Moves
The MPC's decision to lower the repo rate by 25 bps aims to support the economy amid global economic challenges.
Authored By Laukik Bagwe:
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on February 7 initiated its long-awaited rate cut cycle, reducing the repo rate by 25 basis points to 6.25 per cent, effective immediately. This marks the first reduction in nearly five years, with the last rate cut taking place in May 2020. The MPC’s decision to lower the repo rate aims to support the economy amid global economic challenges and is accompanied by adjustments to the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates, which now stand at 6.00 per cent and 6.50 per cent, respectively.
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The RBI’s move aligns with market expectations and reflects the central bank’s continued commitment to a neutral policy stance, focusing on managing inflation while bolstering economic growth. The MPC highlighted the complexities of the global economic landscape, including stalled progress in global disinflation, large capital outflows from emerging markets, and significant foreign exchange depreciation. These factors are complicating the trade-offs faced by central banks worldwide.
For FY25, the RBI has revised its growth forecast to 6.40 per cent, with a projected growth of 6.70 per cent for FY26. The MPC anticipates a mixed demand scenario, with urban demand expected to remain subdued, while rural demand is expected to see an uptrend. Manufacturing activity is also projected to improve. Inflation for FY25 is projected at 4.80 per cent, with a slightly lower forecast of 4.20 per cent for FY26, with risks seen as evenly balanced.
The RBI’s inflation outlook reflects expectations of a significant softening in food inflation, supported by good kharif crop production, easing winter vegetable prices, and favourable prospects for the rabi crop. Core inflation, however, is expected to rise but remain moderate.
Although the RBI has not announced additional liquidity measures, it has outlined upcoming interventions, including a 56-day variable rate repo auction (VRR) of Rs 50,000 crore and two open market operations (OMO) purchases totalling Rs 40,000 crore. These measures are expected to ensure adequate liquidity and support the broader financial system.
The central bank remains committed to providing both transitory and durable liquidity in a proactive manner, which is likely to offer comfort to markets in the near term. The MPC’s decision also signals its confidence that food inflation is under control and may continue to moderate, aligning with the central bank’s inflation target.
Despite the rate cut, the RBI remains cautious about further monetary easing, emphasising a data-dependent approach to future policy decisions. With food and fuel inflation likely to stabilise in line with global averages, a more gradual approach toward the 4 per cent inflation target seems appropriate. As the RBI navigates these challenging economic conditions, its focus will be on supporting domestic growth through effective liquidity management. Remaining vigilant about external risks will be crucial for the RBI in shaping the nation’s economic trajectory in the coming months.
In future policy statements, the RBI may provide further clarity on its stance regarding positive real interest rates and how this will influence its approach to managing inflation and supporting growth in the post-pandemic recovery phase.
(The author is head of fixed income, ITI Mutual Fund. Views are personal.)
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