“We add that passthrough risks from a weaker rupee are also not material at this juncture with low global oil prices.”
FinTech BizNews Service
Mumbai, February 7, 2025: Sanjay Malhotra, Governor, Reserve Bank of India, announced the decisions of the MPC on Friday. RBI Reduced the Repo Rate By 25 Bps For 1st Time In 5 Years.
Radhika Rao, Executive Director and Senior Economist, DBS Bank, explains: Reserve Bank of India monetary policy committee (MPC) lowered the repo rate by 25bp to 6.25%, in line with our call. This move comes after they stayed on hold since February 2023 and since the last rate cut in May 2020. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.0% and the marginal standing facility (MSF) rate and the Bank Rate to 6.5%. The stance remained unchanged at ‘neutral’.
· The decision to cut was unanimous. To recall, two of three external members had voted for a cut at the December 2023 rate meeting.
· Composition of the MPC has undergone a change with new external members appointed in Oct 2023, Governor Malhotra who took office in December 2023 and a new Deputy Governor who will be named shortly.
· While no fresh measures on liquidity were announced, in his maiden policy meeting, Governor Malhotra emphasised that developments were under watch and all options would be weighed including transient and durable injections on a need basis.
Economic assessment
· Growth is seen facing headwinds from geo-political tensions, protectionist trade policies, volatility in international commodity prices and financial market uncertainties. The central bank nonetheless drew comfort from healthy rabi sowing, household consumption is expected to benefit from tax relief, private capex is expected to recover on cleaner balance sheets and government’s investment push. In totality, FY26 growth was expected to average 6.7% YoY. There was no explicit FY25 forecast, but the Governor referred to the first advance estimate at 6.4% (DBSf 6.3%).
· Inflation risks are expected to recede. As food pressures abate, barring any unexpected supply shocks, inflation is expected to ease on firmer kharif output, and winter disinflation in vegetables. We add that passthrough risks from a weaker rupee are also not material at this juncture with low global oil prices. FY26 CPI inflation is projected at 4.2% vs 4.8% in FY25.
Policy Outlook
The RBI MPC pivoted towards supporting growth, as inflation forecasts point to an alignment to the 4% target. Holding back outright dovish signals, the policy commentary signalled a preference to stay flexible. By retaining the neutral stance on Friday, the MPC retained flexibility for their future course of action, subject to domestic and external developments, which in our view leans towards further rate cuts. Secondly, the Governor’s statement: “Using the flexibility embedded in the framework while responding to the evolving growth-inflation dynamics”. Emphasing on flexibility in the inflation targeting framework suggests that while policymakers seek a durable alignment with the inflation target, they will leave some room to manoeuvre, subject to their reading of the environment.
January inflation is likely to ease to 4.5% YoY vs December’s 5.2%, on broad-based deceleration in food, slowdown in staples as well as perishables. On growth, the MPC expects a recovery to 6.7% in FY26, which might be viewed as optimistic, on the back of slowing personal loan growth, softening PMIs, the absence of an aggregate pickup in corporate sector capex and pressure on household’ balance sheets. Adding to this, fiscal policy assumed a contractionary impulse on the back of a narrower deficit target for FY26 notwithstanding tax relief, passing the baton to monetary policy to shift to a growth supportive stance.
Recent rupee depreciation has raised concerns over pass through to price pressures. A 5% depreciation in the currency adds 0.35pp to headline inflation according to the central bank, although manufacturers are unlikely to immediately and fully pass on costs amidst the ongoing cyclical slowdown. An escalation in the US-China trade skirmish will also impart a deflationary impulse, as China will seek to channel more exports into this region.
Risk of transmission from higher oil onto local fuel prices is limited as official preference will be to keep domestic petrol and diesel costs unchanged to preserve households’ purchasing power. The RBI joined regional central banks to give higher weightage to domestic priorities, viewing volatility in their currency and bond markets as driven by global triggers. We maintain our call for another 25bp cut in April and expect the end-2025 repo rate to ease to 5.75%.
