Slashing policy rates for the second time in a row, the Monetary Policy Committee of the Reserve Bank of India today unanimously announced a reduction of 25 basis points in the policy repo rate, bringing it down to 6 percent. Consequently, the standing deposit facility -SDF rate under the liquidity adjustment facility shall stand adjusted to 5.75 percent and the marginal standing facility – MSF rate and the Bank Rate to 6.25 per cent. In February this year, the MPC lowered the repo rate by 25 basis points. It was the first reduction since May 2020 and the first revision after two-and-a-half years.
On inflation, the Reserve Bank has said that food inflation dropped to a 21-month low of 3.8 per cent in February backed by a strong seasonal correction in vegetable prices. Core inflation, however, inched up to 4.1 per cent in February 2025, driven primarily by a sharp pick-up in gold prices. Noting that fall in crude oil prices augurs well for the inflation outlook, the RBI has projected CPI inflation at 4 percent for 2025-2,6, considering the upside risks due to adverse weather-related events, supply and lingering global market uncertainties.
Moreover, the MPC has changed its stance from neutral to accommodative as the rapidly evolving situation requires continuous monitoring and assessment of the economic outlook. Going forward, the Governor said that in the absence of any future shocks, the MPC is considering only two options – status quo or a rate cut. He also clarified that the stance should not be directly associated with liquidity conditions.
Talking about the global tariff situation and its effect on growth, the RBI Governor said that uncertainty in itself dampens growth by affecting the investment and spending decisions of businesses and households. He said the dent in global growth due to trade frictions will impede domestic growth, while higher tariffs shall have a negative impact on net exports. Mr. Malhotra, however, said the quantification of the adverse effect is difficult, considering the impact of relative tariffs, the elasticities of India’s export and import demand, and the policy measures adopted by the Government including the proposed Foreign Trade Agreement with the USA. The RBI Governor said all central banks are treading cautiously considering the weakening of the US dollar, softening of bond yields, correction in equity markets and fall in crude oil prices.
The next meeting of the MPC is scheduled from 4th to 6th June 2025.
