RBI Monetary Policy: Repo Rate Cut By 25 Basis Points To 6.25%

India's Monetary Policy Committee, led by newly appointed RBI Governor Sanjay Malhotra, cut the benchmark repo rate by 25 basis points, while maintaining its neutral stance. This is the first time in two years that the MPC has changed the benchmark lending rate and the first time in five years that rates have been cut.

After the review, the MPC decided the following on lending rates:

• To cut the repo rate by 25 basis points to 6.25% unanimously.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, is at 6.0%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, is 6.5%.

A Bloomberg poll of economists expected a 25 basis points rate cut. The neutral stance permits the MPC to move as per requirement, the RBI Governor said.

The Indian economy, while remaining strong and resilient, was also impacted by global headwinds, Malhotra said. While inflation has eased, GDP growth has slowed, despite expectations of a recovery going ahead, he said, speaking about the growth-inflation tradeoff.

RBI will continue to proactively take measures to ensure orderly liquidity condition's for the system, Malhotra said. On FX interventions, he said that the central bank's interventions in the forex market focus on smoothening excessive and disruptive volatility. These interventions do not target any level for the rupee, he said, adding that the RBI will continue with its extant policy on FX management.

Inflation Outlook

Retail inflation continued to moderate to 5.2% in December from 5.5% in November, led by lower vegetable prices.

• Going ahead, food inflation pressures, absent any supply side shock, should see a significant softening due to good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects

• Core inflation is expected to rise but remain moderate.

• Continued uncertainty in global financial markets coupled with volatility in energy prices and adverse weather events presents upside risks to the inflation trajectory.

Inflation for Q4FY25 was earlier projected at 4.5%.

Growth Outlook

The gross domestic product is estimated to grow 6.4% in fiscal 2025, according to the first advance estimates released by the government. This is the slowest pace of growth in four years and compared to a provisional estimate of 8.2% for fiscal 2024. High frequency indicators continue to show subdued urban consumption, while corporate earnings indicate mild recovery from a quarter ago, Malhotra said.

• Looking ahead, household consumption is expected to remain robust aided by the tax relief in the Union Budget 2025-26

• robust kharif food grain production and good rabi prospects, coupled with an expected pickup in industrial activity and sustained buoyancy in services, augur well for private consumption.

• Fixed investment is expected to recover, supported by higher capacity utilisation levels, healthy balance sheets of financial institutions and corporates, and Government's continued emphasis on capital expenditure.

Real GDP growth for first quarter of fiscal 2026 is projected at 6.9% and 7.3% for the second quarter.

If growth continues to disappoint, the onus will fall on the RBI in terms of heavy lifting, with limited fiscal space, said Teresa John, economist at Nirmal Bang Institutional Equities. This will mean additional liquidity measures and rate cuts and possibly a change in stance to accomodative, she said.

"We believe this is the start to a relatively shallow rate cut cycle of 75 basis points."

Additional liquidity measures are likely, with OMO purchases/FX purchases of at least Rs 1 lakh crore anticipated over the next 12 months, John said.