Reserve Bank Governor Sanjay Malhotra on Friday said given the macroeconomic outlook when inflation is expected to align with the target, and recognising that monetary policy is forward-looking, a lower policy rate was more appropriate at the current juncture.
“Need to preserve high growth momentum, price stability as food inflation outlook is turning decisively positive,” Malhotra said in the MPC minutes.
The six-member monetary policy committee (MPC) of the Reserve Bank considered the worries over growth and an easing inflation trajectory as the best bet to begin a baby step towards an easier money regime by cutting the repo rate by 25 bps to 6.25% at the February 7 policy review, showed the minutes of the meeting released on Friday.
The change in the MPC was primarily driven by the 5.4% GDP print in Q2, which led RBI to slash its own projection by 60 bps to 6.6% in the December policy. On the back of better supplies, food prices declined to 8% in January, taking the headline inflation reading to a low 4.8%, down from 5.2% in the previous month.
There has been a shift in the domestic growth-inflation balance since the December policy: while the inflation registered sequential softening, growth outcomes were weaker. Heightening uncertainties, emanating from the global financial markets and trade policies, too, cloud the outlook for domestic growth and inflation, said RBI deputy governor M Rajeshwar Rao, who is incharge of the monetary policy department at the central bank, in his responses at the meeting.
On February 7, the RBI announced a 25 bps rate cut for the first time since the May 2020 unconventional reduction of 50 bps to 4% in the peak of the pandemic.
The RBI has increased the repo rate by 250 bps between May 2022 and February 2023. Since April 2023, the repo rate has been steady at 6.5% as inflation went over the roof.
The external member of the panel Ram Singh said given the demand boost from budget 2025, a rate cut powered by a commensurate increase in liquidity will decrease the risk premium demanded by investors, thereby boosting private investment to support growth.
By reducing the cost of capital, the rate cut can increase the commercial viability of the public-private partnership schemes for warehouses, cold storage, and infrastructure logistics. By reducing the wastage of fruits and vegetables such investments can help induce a virtuous cycle of faster growth and lower inflation, he added.