On February 7, 2025, the Reserve Bank of India (RBI) announced its latest monetary policy decisions, marking the first policy declaration under Governor Sanjay Malhotra. Below is a detailed point-by-point analysis:
1. Repo Rate Reduction:
- Decision: The Monetary Policy Committee (MPC) reduced the repo rate by 25 basis points, bringing it down to 6.25%.
- Significance: This marks the first rate cut in nearly five years, with the previous reduction occurring in May 2020.
2. Rationale Behind the Rate Cut:
- Economic Growth: India’s GDP growth has decelerated to 5.4% in the second quarter of FY 2024-25, the slowest in two years.
- Inflation Trends: Retail inflation (CPI) has moderated, standing at 5.22% in December 2024, and is projected to decline further, providing the RBI with room to support growth.
3. Policy Stance:
- Neutral Approach: The MPC maintained a “neutral” policy stance, indicating flexibility to respond to evolving economic conditions.
4. Market Reactions:
- Bond Market: Following the announcement, India’s 10-year bond yield experienced a slight uptick.
- Currency Movement: The Indian rupee appreciated to 87.38 against the U.S. dollar post-decision.
- Equity Markets: Major equity indices registered modest gains in response to the rate cut.
5. Future Outlook:
- Growth Projections: The government forecasts annual growth at 6.4% until March 2025, the slowest in four years, impacted by a weaker manufacturing sector and reduced corporate investments.
- Inflation Expectations: Inflation is expected to decline further, barring any unexpected supply disruptions, providing policymakers with more flexibility.
6. Expert Opinions:
- Analyst Views: Economists had widely anticipated the 25 basis point rate cut, citing the need to bolster economic growth amid controlled inflation.
Conclusion:
The RBI’s decision to reduce the repo rate reflects a strategic move to stimulate economic activity in the face of slowing growth and moderating inflation. The neutral policy stance suggests that the central bank remains vigilant and prepared to adjust its approach as economic conditions evolve.
