MPC opted for a Rate Cut after nearly 5 Years

On 7^th February 2025, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), has announced its Monetary Policy Statement. MPC opted for a rate cut after nearly 5 years. The rate cut happened after 11 times MPC went for a pause of interest rate. Let us see the MPC statement in detail now.

MPC Opted for Rate Cut after nearly 5 years

MPC unanimously reduced the key policy rate (i.e. repo rate) by 25 basis points to 6.25% with immediate effect.

As a result, the Standing Deposit Facility (SDF) rate shall stand adjusted at 6.00% and the Marginal Standing Facility remains at 6.50%.

The MPC continues to keep a neutral policy stance to ensure that inflation aligns with the target gradually and supports growth.

MPC on Gross Domestic Product (GDP) Estimates

MPC stated that as per First Advance Estimates, the real GDP is estimated to grow by 6.4% Year-on-Year (Y-o-Y) in 2024-25. On the Supply Side, Gross Value added (GVA), growth is supported by the services sector and recovery in the agriculture sector, while slow industrial growth is a drag/ barrier.

Looking ahead, economic growth in 2025–2026 should be supported by an anticipated revival in industrial activity and favourable rabi prospects. Household consumption is anticipated to continue to be one of the main demand-side drivers, thanks to the tax reliefs in the Union Budget 2025–2026.

Higher levels of capacity utilisation, the healthy balance sheet of corporate financial institutions, and the government’s ongoing emphasis on capital expenditure are all likely to help the recovery of fixed investment.

MPC considered all these factors. On the risks side, geopolitical tensions, protectionist trade policies, international commodity prices and international financial market volatility are also taken into consideration.

MPC estimated that the real GDP growth for 2024-25 to grow at is projected at 6.7%; with Q1 at 6.7%; Q2 at 7.0%; and Q3 and Q4 at 6.5% (Chart 1). MPC stated that there is a threat of downside risks to the outlook.

Source: Monetary Policy Statement, 2024-25, RBI

MPC on Inflation

MPC stated that CPI headline Inflation has softened sequentially in November-December 2024, from its recent peak of 6.2% in October 2024. The decline in inflation is mainly due to stable food inflation, as vegetable prices came down from their peak in October. The core inflation continued to stay low across goods and services, while the fuel group continued to be in deflation.

With good kharif production, lower winter vegetable prices, and a positive rabi crop forecast, food inflation should significantly ease in the future, provided there are no unexpected supply-side issues. While core inflation is anticipated to climb, the increase should be modest. The inflation outlook faces upside risks from unstable global financial markets, fluctuating energy costs, and negative weather impacts.

After considering all these factors, MPC estimated that, for 2024-25, the inflation will be at 4.8% with Q4 at 4.4%. In 2025-26, CPI inflation is estimated at 4.2% with Q1 at 4.5%, Q2 at 4.0%; Q3 at 3.8%; and Q4 at 4.2%, it is with an assumption of a normal monsoon next year. It also stated that “the risks are evenly balanced”.

Source: Monetary Policy Statement, 2024-25, RBI

MPC Stance

The MPC observed that there is a decrease in inflation. With the help of a positive food outlook and the ongoing transmission/implementation of previous monetary policy measures, it is anticipated to further moderate in 2025–2026, slowly aligning with the target.

According to the MPC, growth is still much below last year’s level even though it is anticipated to rebound from the Q2 2024–25 low.

“These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target.“ says MPC.

Therefore, the policy repo rate was lowered by 25 basis points to 6.25% by a unanimous decision of the MPC.

However, there are risks to the growth and inflation prospects from unfavourable weather occurrences, excessive volatility in global financial markets, and ongoing uncertainty about global trade policy. The MPC must therefore be vigilant.

As a result, the MPC decided to maintain its neutral position by a unanimous vote.

This will provide MPC with the adaptability it needs to react to the changing macroeconomic landscape.

The Governor of RBI has announced certain Additional measures, which are as follows.

Cybersecurity

First, cybersecurity – the surge in digital fraud is a matter of concern that warrants action by all stakeholders. Additional Factor of Authentication (AFA) for domestic digital payments is proposed to extend to online international digital payments made to offshore merchants, who have been granted access to such authentication.
The Reserve Bank will also introduce the special ‘bank.in’ domain for Indian banks. This domain name registration will start in April of this year. This will lessen the likelihood of banking fraud. The finance industry’s “fin.in” domain will come after this.

Introduction of forward contracts in Government Securities

The RBI has been increasing the range of interest rate derivative products that market participants can use to control their interest rate risks during the last few years. The RBI shall now include forward contracts in Government securities to this suite, This would let long-term investors, like insurance funds, control their interest rate risk over the course of interest rate cycles. Effective pricing of derivatives with government securities as underlying instruments will also be made possible by it.

Access of SEBI-registered non-bank brokers to NDS-OM

The RBI will allow non-bank brokers who are registered with SEBI to use NDS-OM, the electronic trading platform for secondary market transactions in government securities, in order to improve retail investors’ to access these securities.

Withdrawal of ₹2000 Denomination Banknotes – Status

Additionally, RBI also released data on the withdrawal of ₹2000 Denomination Banknotes – Status. According to this, the ₹2000 banknotes in circulation have declined to ₹6,577 crore at the close of business on January 31, 2025.

It is to be noted that when RBI announced the withdrawal of ₹2000 banknotes in circulation, the total value of ₹2000 banknotes in circulation, which was ₹3.56 lakh crore at the close of business on May 19, 2023,

This makes 98.15% of the ₹2000 banknotes in circulation returned since May 19, 2023. However, the ₹2000 banknotes continue to be legal tender.

My Perspective and Takeaways

Though GDP Growth projection of 6.7% seems to be more realistic with the prevailing economic and global situations, there are high downside risks, which RBI has also acknowledged in its MPC this time. This is where the policy framework plays a vital role in avoiding these risks.

Deflationary Trajectory remains the main aim for RBI till Inflation reaches its target of 4%. It’s good to see that RBI has also started eyeing core inflation.

For the first time since May 2020, the RBI has cut its interest rate after 11 pauses – in its first MPC meeting in 2025.

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