The MPC, comprising three RBI officials and three external members, voted to lower the repo rate from 6.5% to 6.25%. This move aligns with market expectations and reflects the central bank's response to decelerating economic activity.
India's annual growth is projected at 6.4% for the fiscal year ending in March, a decline attributed to a sluggish manufacturing sector and diminished corporate investments. In an effort to bolster spending and growth, the government recently introduced tax cuts while maintaining a balanced fiscal deficit.
Inflation has eased to 5.22% in December, down from previous months, and is anticipated to decline further, provided there are no unforeseen supply disruptions. Despite remaining above the RBI's 4% target, the downward trend in inflation has provided the central bank with the leeway to adjust rates in support of economic growth.
Following the rate cut announcement, India's 10-year bond yield rose by four basis points to 6.69%, the rupee appreciated to 87.38 against the U.S. dollar, and benchmark stock indices each gained 0.2%. These market reactions indicate investor optimism regarding the central bank's efforts to stimulate the economy.
Sanjay Malhotra, who assumed the role of RBI Governor on December 11, 2024, presided over this policy decision. A 1990-batch Indian Administrative Service officer from the Rajasthan cadre, Malhotra holds a degree in Computer Science from the Indian Institute of Technology, Kanpur, and a Master's in Public Policy from Princeton University. His extensive experience spans finance, taxation, power, information technology, and mining.
Prior to his appointment as RBI Governor, Malhotra served as the Revenue Secretary in the Ministry of Finance, where he played a pivotal role in formulating tax policies and managing the government's revenue streams. His leadership is expected to bring a balanced approach to India's monetary policy, addressing current economic challenges while ensuring stability and growth.
The RBI's decision to cut the repo rate is seen as a strategic move to stimulate economic activity by making borrowing more affordable for businesses and consumers. By reducing the cost of loans, the central bank aims to encourage investment and spending, thereby fostering economic growth.
Analysts suggest that the rate cut could be the first in a series of measures aimed at revitalizing the economy. The central bank may also consider liquidity adjustments and other policy tools to ensure that the benefits of the rate cut are transmitted effectively through the financial system.
However, challenges remain. The global economic environment is fraught with uncertainties, including trade tensions and geopolitical risks, which could impact India's economic prospects. Domestically, structural issues such as labor market rigidities and infrastructure bottlenecks continue to pose obstacles to sustained growth.
In this context, the RBI's policy decisions will need to be carefully calibrated to balance the objectives of fostering economic growth and maintaining price stability. The central bank's commitment to a "neutral" monetary policy stance suggests that it remains open to adjusting rates in either direction, depending on how economic conditions evolve.
The government's recent budgetary measures, including tax cuts, are expected to complement the RBI's monetary easing by boosting consumer spending and business investment. These fiscal initiatives, combined with the central bank's accommodative stance, are aimed at reinvigorating the economy and setting it on a path of sustainable growth.