MPC opted for a Rate Cut
On 9th April 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 Second Time in a Row. Let us see the MPC statement in detail now.
MPC opted for a Rate Cut Second Time in a Row – Monetary Policy Statement, April 2025
MPC unanimously reduced the key policy rate (i.e. repo rate) by 25 basis points to 6% with immediate effect.
As a result, the Standing Deposit Facility (SDF) rate shall stand adjusted at 5.75% and the Marginal Standing Facility remains at 6.25%.
The decision aligns to reach a medium-term CPI inflation target of 4% with a band of +/- 2%, all while also promoting growth.
The MPC changes its neutral policy stance to accommodative. Ensure that inflation aligns with the target gradually and supports growth.
MPC on Gross Domestic Product (GDP) Estimates
The National Statistics Office (NSO) has projected real GDP growth at 6.5% for 2024-25, following a 9.2% growth in 2023-24. Factors such as rural demand, urban consumption revival, increased government capital expenditure, and healthy balance sheets are expected to support growth. However, global economic uncertainty may impact merchandise exports. On the supply side, Agricultural prospects are positive, industrial activity is recovering, and services sector resilience is expected.
Global trade disruptions pose downside risks. Taking all factors into consideration the real GDP growth for 2025-26 is forecasted at 6.5%, with Q1 at 6.5%, Q2 at 6.7%, Q3 at 6.6%, and Q4 at 6.3%. MPC stated that “the risks are evenly balanced”.
Source: RBI MPC Statement
MPC on Inflation
The headline inflation in India experienced a decline of 1.6 percentage points from 5.2% in December 2024 to 3.6% in February 2025. This was mainly due to a significant decrease in food inflation, which reached a 21-month low of 3.8% in February. The fuel group remained in deflation, while core inflation increased to 4.1% in February, driven by a rise in gold prices.
The outlook for food inflation is positive, with a seasonal correction in vegetable prices and improved estimates for wheat and key pulses production. Inflation expectations for the future have decreased, and falling crude oil prices are expected to benefit the inflation outlook. However, global market uncertainties and weather-related supply disruptions could pose risks to the inflation trajectory.
Based on these factors and assuming a normal monsoon, CPI inflation for the financial year 2025-26 is projected at 4.0%, with quarterly rates of 3.6% in Q1, 3.9% in Q2, 3.8% in Q3, and 4.4% in Q4. It also stated that “the risks are evenly balanced”.
Source: RBI MPC Statement
MPC Stance
The Monetary Policy Committee (MPC) acknowledged that inflation is currently below the target, largely due to a significant decrease in food inflation. According to RBI projections, the inflation is indicating a higher level of confidence in accomplishing a sustained alignment of headline inflation with the target of 4% over the next 12 months.
On the other hand, economic growth has been gradually recovering after a lackluster performance in the first half of 2024-25, although the economy continues to face challenges with the global environment. While risks to growth are evenly balanced around the baseline projections, uncertainties persist amidst recent spikes in global volatility.
Given the challenging global economic conditions, the MPC emphasized the need to support growth through a combination of benign inflation and a moderate growth outlook.
Consequently, the MPC unanimously agreed to reduce the policy repo rate by 25 basis points to 6.00%. The MPC also changed its stance from neutral to accommodative.
However, the committee highlighted the importance of continuous monitoring and assessment of the economic outlook, given the rapidly evolving situation. This proactive approach will enable the MPC to adapt its policies accordingly and ensure stability in the face of ongoing uncertainties.
My Perspective and Takeaways
The GDP Growth projection is recalibrated from 6.7% in February MPC to 6.5% at the present (April Meeting). However, this seems to be more realistic given the prevailing economic and global situations. However, downside risks are equally high which is where policy framework plays a vital role to avoid these risks.
Keeping inflation under control remains the main aim of RBI. Though inflation is under control the core inflation has started to climb up slowly. This cannot be ignored and policymakers need to be vigilant on these.
This is the second rate cut in the last two MPC meetings. How the economy responds to these rate cuts we need to wait and watch. As the policy measures and outcomes from it always have a time lag.
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