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Informist, Friday, Feb. 21, 2025

 

NEW DELHI – Concerns about a sharp slowdown in growth seemingly overpowered the Monetary Policy Committee's inflation mandate at its meeting earlier this month when it decided to cut the repo rate for the first time in nearly five years, minutes of the meeting released on Friday showed.

 

"...having duly sequenced our stance and liquidity measures during the last two policies and given the outlook on inflation, time has come to accord higher weight to growth in our policy setting," Reserve Bank of India Executive Director Rajiv Ranjan said in his statement in the minutes.

 

On Feb. 7, RBI Governor Sanjay Malhotra announced the MPC's decision to cut the repo rate by 25 basis points to 6.25?ter data released late November showed GDP growth had crashed to a seven-quarter low of 5.4% in Jul-Sept, while the first advance estimate of 2024-25 (Apr-Mar) GDP pegged the full-year growth rate at a four-year low of 6.4%. While the MPC did not cut rates in December, which Ranjan said in his statement released Friday that doing so would not have been "credible and optical" at a time when headline retail inflation was above 6%, it reduced the Cash Reserve Ratio by 50 bps to 4.00?ter having loosened the stance of policy to neutral in October.

 

In addition to Ranjan--who also said growth slowdown concerns are "more evident today" and that there is a need to preserve the high growth momentum over the medium term--Malhotra said there is "a need to preserve the high growth momentum, while maintaining price stability". Other members of the MPC were even more expressive about their worries on growth, with external member Nagesh Kumar saying the committee "could be more ambitious and target a 50 bps cut". "It would send a signal to the markets and private investors within and outside the country that India is serious and would do whatever it takes to revive economic growth momentum," Kumar said in his statement.

 

Kumar, who has voted for a 25 bps rate cut in each of the three meetings he has been a part of, said the slowdown of the manufacturing sector is "a matter of concern". Fellow external member Ram Singh pointed to low real wage growth as the reason for subdued private consumption, adding that "excessively contractionary monetary policy has aggravated the problem".

 

"The combination of a persistently low core inflation rate during the last two years and the slowdown in FY25 suggests that the actual growth is significantly below the potential growth rate," Singh further said.

 

External member Saugata Bhattacharya echoed Singh's sentiment, saying that the RBI's inflation forecasts suggested the policy rate "might soon, if not even as of now, become excessively restrictive" and that the required policy response on the inflation-growth trade-off "seems skewed in favour of the latter".

 

While growth troubles weighed on the MPC's collective mind, committee members were increasingly comfortable on the price front, with Governor Malhotra saying the food inflation outlook is "turning decisively positive".

 

Data released after the MPC's meeting earlier this month showed headline retail inflation and food inflation both fell to five-month lows of 4.31% and 6.02%, respectively, in January, with the Consumer Food Price Index down 2.9% month-on-month. According to Deputy Governor M. Rajeshwar Rao--who holds temporary charge of the Monetary Policy Department--a favourable rabi season, kharif market arrivals, and the ongoing seasonal correction in prices of vegetables "should lead to a significant easing of food inflation pressures in the coming months". Other members of the committee felt similarly, with Bhattacharya "now cautiously optimistic about the downward trajectory of inflation".

 

As per the RBI's latest forecast, CPI inflation is seen averaging 4.4% in Jan-Mar before rising slightly in Apr-Jun to 4.5%. However, it is then expected to drop sharply to 3.8% in Jul-Sept and 4.0% in the last quarter of 2025. In FY26 as a whole, the central bank sees inflation averaging 4.2%, down from 4.8% in FY25.

 

The MPC is scheduled to next meet Apr. 7-9.  End

 

Reported by Siddharth Upasani

Edited by Ashish Shirke

 

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