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The Reserve Bank of India's Monetary Policy Committee (MPC) held its 53rd meeting from February 5 to 7, 2025, where it unanimously decided to reduce the policy repo rate by 25 basis points to 6.25% to support economic growth while maintaining a neutral monetary policy stance. The MPC assessed various macroeconomic factors, projecting real GDP growth of 6.7% for 2025-26 and CPI inflation at 4.2%, amid concerns over global economic conditions and domestic manufacturing sector weaknesses. The minutes of the meeting will be published on February 21, 2025, with the next MPC meeting scheduled for April 7-9, 2025.

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23 views14 pages

Zsadfgdg

The Reserve Bank of India's Monetary Policy Committee (MPC) held its 53rd meeting from February 5 to 7, 2025, where it unanimously decided to reduce the policy repo rate by 25 basis points to 6.25% to support economic growth while maintaining a neutral monetary policy stance. The MPC assessed various macroeconomic factors, projecting real GDP growth of 6.7% for 2025-26 and CPI inflation at 4.2%, amid concerns over global economic conditions and domestic manufacturing sector weaknesses. The minutes of the meeting will be published on February 21, 2025, with the next MPC meeting scheduled for April 7-9, 2025.

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�ेस �काशनी PRESS RELEASE

भारतीय �रज़वर् ब�क


RESERVE BANK OF INDIA

वेबसाइट : www.rbi.org.in/hindi संचार िवभाग, क� �ीय कायार्लय, शहीद भगत �संह मागर्, फोटर्, मुब
ं ई - 400 001
Website : www.rbi.org.in Department of Communication, Central Office, Shahid Bhagat Singh Marg, Fort,
ई-मेल/email : [email protected] Mumbai - 400 001 फोन/Phone: 022 - 2266 0502

February 21, 2025

Minutes of the Monetary Policy Committee Meeting, February 5 to 7, 2025


[Under Section 45ZL of the Reserve Bank of India Act, 1934]

The fifty third meeting of the Monetary Policy Committee (MPC), constituted under
Section 45ZB of the Reserve Bank of India Act, 1934, was held during February 5 to
7, 2025.

2. The meeting was chaired by Shri Sanjay Malhotra, Governor and was attended
by all the members – Dr. Nagesh Kumar, Director and Chief Executive, Institute for
Studies in Industrial Development, New Delhi; Shri Saugata Bhattacharya, Economist,
Mumbai; Professor Ram Singh, Director, Delhi School of Economics, Delhi; Dr. Rajiv
Ranjan, Executive Director (the officer of the Reserve Bank nominated by the Central
Board under Section 45ZB(2)(c) of the Reserve Bank of India Act, 1934), and Shri M
Rajeshwar Rao, Deputy Governor in charge of monetary policy.

3. According to Section 45ZL of the Reserve Bank of India Act, 1934, the Reserve
Bank shall publish, on the fourteenth day after every meeting of the Monetary Policy
Committee, the minutes of the proceedings of the meeting which shall include the
following, namely:

(a) the resolution adopted at the meeting of the Monetary Policy Committee;
(b) the vote of each member of the Monetary Policy Committee, ascribed to such
member, on the resolution adopted in the said meeting; and
(c) the statement of each member of the Monetary Policy Committee under sub-
section (11) of section 45ZI on the resolution adopted in the said meeting.

4. The MPC reviewed the surveys conducted by the Reserve Bank to gauge
consumer confidence, households’ inflation expectations, corporate sector
performance, credit conditions, the outlook for the industrial, services and
infrastructure sectors, and the projections of professional forecasters. The MPC also
reviewed in detail the staff’s macroeconomic projections, and alternative scenarios
around various risks to the outlook. Drawing on the above and after extensive
discussions on the stance of monetary policy, the MPC adopted the resolution that is
set out below.

Resolution

5. The Monetary Policy Committee (MPC) held its 53rd meeting from February 5
to 7, 2025 under the chairmanship of Shri Sanjay Malhotra, Governor, Reserve Bank

1
of India. The MPC members Dr. Nagesh Kumar, Shri Saugata Bhattacharya, Prof.
Ram Singh, Dr. Rajiv Ranjan, and Shri M. Rajeshwar Rao attended the meeting. After
assessing the current and evolving macroeconomic situation, the MPC unanimously
decided to:

• reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25
basis points to 6.25 per cent with immediate effect; consequently, the standing
deposit facility (SDF) rate shall stand adjusted to 6.00 per cent and the marginal
standing facility (MSF) rate and the Bank Rate to 6.50 per cent;

• continue with the neutral monetary policy stance and remain unambiguously
focussed on a durable alignment of inflation with the target, while supporting
growth.

These decisions are in consonance with the objective of achieving the medium-
term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2
per cent, while supporting growth.

Growth and Inflation Outlook

6. The global economy is growing below the historical average even though high
frequency indicators suggest resilience amidst continued expansion in world trade.
The world economic landscape remains challenging with slower pace of disinflation,
lingering geopolitical tensions and policy uncertainties. The strong dollar, inter alia,
continues to strain emerging market currencies and enhance volatility in financial
markets.

7. On the domestic front, as per the First Advance Estimates (FAE), real gross
domestic product (GDP) is estimated to grow at 6.4 per cent (y-o-y) in 2024-25
supported by a recovery in private consumption. On the supply side, growth is
supported by the services sector and a recovery in agriculture sector, while tepid
industrial growth is a drag.

8. Looking ahead, healthy rabi prospects and an expected recovery in industrial


activity should support economic growth in 2025-26. Among the key drivers on the
demand side, household consumption is expected to remain robust aided by the tax
relief in the Union Budget 2025-26. Fixed investment is expected to recover, supported
by higher capacity utilisation levels, healthy balance sheets of financial institutions and
corporates, and Government’s continued emphasis on capital expenditure. This is
corroborated by positive business sentiments highlighted in the Reserve Bank’s
enterprise surveys and PMIs. Resilient services exports will continue to support
growth. However, headwinds from geo-political tensions, protectionist trade policies,
volatility in international commodity prices and financial market uncertainties, continue
to pose downside risks to the outlook. Taking all these factors into consideration, real
GDP growth for 2025-26 is projected at 6.7 per cent with Q1 at 6.7 per cent; Q2 at 7.0
per cent; and Q3 and Q4 at 6.5 per cent each (Chart 1). The risks are evenly balanced.

9. Headline inflation softened sequentially in November-December 2024 from its


recent peak of 6.2 per cent in October. The moderation in food inflation, as vegetable
price inflation came off from its October high, drove the decline in headline inflation.

2
Core inflation remained subdued across goods and services components and the fuel
group continued to be in deflation.

10. Going ahead, food inflation pressures, absent any supply side shock, should
see a significant softening due to good kharif production, winter-easing in vegetable
prices and favourable rabi crop prospects. Core inflation is expected to rise but remain
moderate. Continued uncertainty in global financial markets coupled with volatility in
energy prices and adverse weather events presents upside risks to the inflation
trajectory. Taking all these factors into consideration, CPI inflation for 2024-25 is
projected at 4.8 per cent with Q4 at 4.4 per cent. Assuming a normal monsoon next
year, CPI inflation for 2025-26 is projected at 4.2 per cent with Q1 at 4.5 per cent; Q2
at 4.0 per cent; Q3 at 3.8 per cent; and Q4 at 4.2 per cent (Chart 2). The risks are
evenly balanced.

Rationale for Monetary Policy Decisions

11. The MPC noted that inflation has declined. Supported by a favourable outlook
on food and continuing transmission of past monetary policy actions, it is expected to
further moderate in 2025-26, gradually aligning with the target. The MPC also noted
that though growth is expected to recover from the low of Q2:2024-25, it is much below
that of last year. These growth-inflation dynamics open up policy space for the MPC
to support growth, while remaining focussed on aligning inflation with the target.
Accordingly, the MPC unanimously voted to reduce the policy repo rate by 25 basis
points to 6.25 per cent.

12. At the same time, excessive volatility in global financial markets and continued
uncertainties about global trade policies coupled with adverse weather events pose
risks to the growth and inflation outlook. This calls for the MPC to remain watchful.
Accordingly, the MPC unanimously voted to continue with a neutral stance. This will
provide MPC the flexibility to respond to the evolving macroeconomic environment.

13. The minutes of the MPC’s meeting will be published on February 21, 2025.

3
14. The next meeting of the MPC is scheduled during April 7 to 9, 2025.

Voting on the Resolution to reduce the policy repo rate to 6.25 per cent

Member Vote
Shri Sanjay Malhotra Yes
Dr. Nagesh Kumar Yes
Shri Saugata Bhattacharya Yes
Prof. Ram Singh Yes
Dr. Rajiv Ranjan Yes
Shri M. Rajeshwar Rao Yes

Statement by Dr. Nagesh Kumar

15. I have been concerned with the economy's slowdown since the October 2024
Meeting of the MPC and have been making a case for a rate cut to support growth.
Over the past few months, one has observed with concern the deepening of the growth
slowdown, which has led to the downgrading of the growth outlook for 2024-25 by RBI
from 7.2% in October 2024 policy to 6.6% in December 2024 to 6.4% now, as per the
NSO’s first advanced estimate, i.e. 80 basis points downgrading in a matter of four
months!

16. In particular, the slowdown reflects the weakness of the manufacturing sector,
as the services sector continues to grow robustly, and agriculture growth performance
has improved in the current year. The slowdown of the manufacturing sector is a
matter of concern, given its role in the creation of decent jobs for our youthful
population.

17. Several pointers corroborate the weakness of the manufacturing sector,


including the performance of listed companies, which shows that the sales growth of
manufacturing companies continued to remain weak despite improved profit margins,
with the core sectors like iron & steel, cement, and petroleum products continued to
report negative growth or are shrinking. The business assessment index for
manufacturing enterprises in Q3:2024-25 remained close to their levels in the previous
quarter.

18. The slowdown of the manufacturing sector is resulting from moderate urban
consumption affecting demand for durable goods, and slow growth of private
investment, as also corroborated by the Economic Survey presented on 31 January
2025 by the Government of India. The external environment has also turned less
benign with the subdued performance of the global economy and international trade
and investments. The average annual growth rate of world trade has come down from
around 16-20% during 2003-2008/09 which supported the emergence of China as a
global manufacturing hub, to just 3-4%. 1 This year it is expected to be around 3.4%,
as per the projections of the UN, IMF and the World Bank. Then there is a trend of
rising protectionism with major industrialized countries such as the US pursuing
industrial policy very aggressively with more than a trillion dollars to be given to the

1
ISID (2025) India Industrial Development Report 2024-25, New Delhi: Academic Foundation for Institute for Studies in Industrial
Development (ISID).

4
industry in the form of tax breaks, incentives and subsidies under the Inflation
Reduction Act, the Chips Act and the Infrastructure and Jobs Act. With Mr Trump as
the President, this trend of protectionism is only expected to be accentuated further. It
is also too early to expect that India will be spared while tariffs will be slapped on
Mexico, Canada and China! There are widespread fears of the world economy going
into a deep and prolonged slump with such protectionist trade policies.

19. There is also concern about a threat of dumping of excess capacities in China
with their deep pockets and their access to the Western markets coming under a cloud.
Some of our manufacturing sectors have begun to feel the pinch including steel
(possibly explaining the negative growth) while labour-intensive consumer sectors,
such as garments and leather goods have been facing an onslaught. As the latest
Economic Survey shows, FDI inflows have been subdued, with foreign investors both
FDI and FPIs repatriating, leaving little investments in net terms.

20. Therefore, the case for supporting growth cannot be overemphasised. In the
Union Budget 2025-26 presented on 1 February 2025, the fiscal policy has done its
bit by sustaining the public investment (capex) and through income tax concessions
to the middle-income groups to enhance disposable incomes to augment
consumption. It is now monetary policy's turn to support economic growth through a
rate cut. A rate cut could help to spur demand for investment in housing and durable
consumption goods and could support private investment by lowering the cost of
capital.

21. Fortunately, the inflation outlook has moderated since the last MPC which
provides the elbow room for a rate cut. The inflation for January 2025 is expected to
be sub 5% vis-a-vis 6.2% in October 2024. The CPI headline has come down to 5.2%
in December from 5.5% in November. But CPI excluding food and fuel continues to
stay at 3.7%. The bulk of the inflation, therefore, is on account of food prices, especially
vegetable prices, which result from seasonal demand-supply mismatches that correct
themselves. As I have argued in the previous meetings, monetary policy has
limitations in addressing the demand-supply mismatches in vegetables. Fortunately,
the food prices have started to ease. Furthermore, the Union Budget has accelerated
the path to fiscal consolidation by limiting the fiscal deficit to just 4.4% of GDP for 2025-
26.

22. Globally commodity prices are softening due to several factors. The crude oil
prices are likely to head downwards due to the Chinese slowdown, the recently
announced ceasefire in the Middle East with the prospects of the Ukraine conflict also
brightening with the Trump 2.0 Presidency which is also likely to enhance the US
output of oil and growing dependence on renewables.

23. Considering the seriousness of the growth slowdown and the elbow room
provided by moderating the inflationary outlook, I strongly feel that the MPC should
begin the process of normalisation of the monetary policy with a rate cut. We could be
more ambitious and target a 50 basis point 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.

5
24. However, given the global uncertainties, for the present policy I vote for a 25
basis point cut in the repo rate while keeping the neutral stance.

Statement by Shri Saugata Bhattacharya

25. Directionally, two important macroeconomic indicators, viz. growth and


inflation, have moved favourably since the meeting of Monetary Policy Committee
(MPC) in December 2024.

26. First, domestic economic activity has improved post the GDP growth low of Q2
FY25. The NSO Advance Estimates of GDP FY25 imply H2 GDP growth at 6.7%. The
RBI’s FY26 GDP forecast is 6.7% yoy; the Economic Survey projects 6.3 – 6.8%.
Second, inflationary pressures appear to be gradually receding. The high 6.2% yoy
CPI October ’24 inflation print, which was the proximate factor influencing my vote at
the Dec ’24 MPC meeting, has since moderated to 5.2% in Dec ’24.

27. Despite the improvement in these two indicators there are two pertinent
questions.

28. First, the issue of growth. Preliminary Q3 FY25 financial results of listed
manufacturing companies show growth in net sales barely holding up, while operating
and net profits growth remain under pressure. Although many high frequency
indicators remain resilient, they are weaker than in previous years. While January ‘25
PMIs show continuing economic resilience, the responses in central bank and private
surveys present a mixed picture, again particularly for manufacturing. In other words,
there are sufficient signals suggesting the need to support both consumption and
investment led growth.

29. It is important to keep in mind the possible spillovers of frictions in global trade
and protectionist policies. A global growth slowdown led by disruptions in trade
linkages and uncertainty about responses of global central banks might further
complicate domestic policy choices. The most significant near-term risk of accelerating
policy easing at this juncture is renewed volatility in external financial conditions.

30. Second, on inflation, there is a certain degree of optimism. The FAO Food Price
Index had trended down in December ‘24, with, notably, edible oils prices off their
highs. Major metals prices have also fallen or remain stable. The IEA assesses2 that
non-OPEC+ oil output “additions should cover both potential supply disruptions and
expected demand growth”. While unpredictable, the balance of probability is that high
oil prices will not be a significant risk to the medium-term inflation forecast. The
January ’25 print is widely expected by analysts to be sub-5% yoy. RBI forecasts CPI
inflation for FY26 at 4.2%, with a (slightly wobbly) glide path down to 4.2% in Q4 FY26
(and average 4.0% in H2 FY26). The median forecast for CPI “core” (that excludes
‘Food & Beverages’, ‘Fuel & Light’ and ‘Pan, Tobacco & Intoxicants’) inflation in the
Survey of Professional Forecasters (SPF), while gradually creeping up to 4.1% in Q3
FY26, is, for the most part, lower than the headline CPI target for most quarters. This
is likely to be important reinforcement for a durable alignment of headline inflation with
the target in the medium term.

2
IEA, Oil Market Report, January 2025

6
31. However, the 3- and 12-month ahead RBI Household Inflation Expectations (in
the January ‘25 survey round) have inched up. The IIM Ahmedabad Business Inflation
Survey December ’24 round shows that a majority of respondents expect one-year
ahead input costs to rise sharply. Manufacturing and Services January ’25 PMI
surveys also show both input and output prices rising, albeit in varying magnitudes,
yet mostly above their long-term averages.

32. All things considered, I am now cautiously optimistic about the downward
trajectory of inflation. I believe that, at this point, the required policy response on the
inflation – growth trade-off – even factoring in significant margins of error from
emerging risks – seems skewed in favour of the latter.

33. Given the forecast inflation trajectory, the policy repo rate might soon, if not
even as of now, become excessively restrictive, thereby increasing the risk of
cumulatively damaging growth impulses. This assessment is based on the last study3
of the “real natural rate of interest” that I am aware of.

34. One sector which is vital for stimulating economic activity is MSMEs. Bank
credit to the “Micro and Small Enterprises” segment of MSMEs had slowed to 12.1%
yoy as of December ‘24 vs 20.3% in the corresponding month a year back; in the
manufacturing segment, from 14.8% to 9.8%. For me, this – a slowing momentum in
credit flows to a priority segment – is a matter of concern. As I had noted in my minutes
of the December ’24 MPC meeting, the ratio of interest expenses to EBIDTA for
smaller listed companies remains high; for most small enterprises, this is likely to be
significantly higher. One instrument for inducing increased demand for credit from this
sector is lowering the borrowing cost. Transmission of a policy repo rate cut to
borrowing costs for MSMEs, given EBLR pricing, is likely to be relatively quick. In
addition, RBI’s liquidity infusion measures are likely to gradually ease MCLR-based
borrowing costs, thereby reducing Weighted Average Lending Rates (WALR).

35. A possible repercussion of policy easing might be an increase in currency


volatility and a depreciation of the USDINR pair. This might not be a major cause for
concern. A recent study 4 estimates that if INR depreciates by 5%, CPI “inflation could
be higher by around 35 bps” while GDP growth “could edge up by 25 bps through
short-term stimulation of exports”. This should probably be treated as indicative, given
the significant changes which have happened in the world since this study.

36. Accordingly, based on my assessment of the downward inflation trajectory, I


vote to cut the repo rate by 25 bps to 6.25 per cent. This, I believe, is the appropriate
policy response at this point of the economic cycle. I also vote to continue with the
neutral monetary policy stance. This stance will provide the flexibility to appropriately
respond to any emerging shocks and the resultant uncertainty in the economic
environment.

3
Behera, H. K., “Updating Estimates of the Natural Rate of Interest for India with Post-Pandemic Evidence”, RBI Monthly Bulletin,
July 2024.
4
RBI Monetary Policy Report, October 2024, Section 1.4: Balance of Risks

7
Statement by Prof Ram Singh

37. Since the December meeting of the MPC, we have received additional data
related to the economy's inflation trajectory and growth prospects. Besides, there have
been significant developments on the foreign exchange rates front. These macro data
and related indicators underscore the case for a comprehensive review of the existing
monetary policy (MP).

Inflation

38. Following a predicted downward trajectory, the headline inflation in December


2024 was 5.2%, with CPI inflation excluding food and fuel at 3.7%. Prices of most farm
produce and non-food commodities have moderated, except gold. Looking ahead,
food inflation is likely to soften in Q4:2024-25, and energy prices are also expected to
be stable in the near future. Overall, CPI inflation for 2024-25, projected at 4.8 per
cent, is within the tolerance band though above the 4.0 per cent target.

39. The core goods and services inflation rates in December 2024 have remained
moderate at 3.6% and 3.5%, respectively. The CPI core, excluding petrol, diesel, gold
and silver, is down at 3.3%. For FY 2025-26, the CPI inflation is expected to be 4.2%.

40. The CPI headline inflation figures will appear even more benign if the shares of
food and beverages in the CPI inflation are reduced to their levels observed in the
Household Consumption and Expenditure Surveys (HCES) data of the recent
vintages. As such, the headline Indian inflation rate is actually lower than the global
average.

GDP Growth

41. The RBI has significantly lowered the GDP growth forecast for FY25 from 7.2
to 6.4 per cent. In Q3:2024-25, the manufacturing sector sales growth remains
subdued, and net profit margins have further moderated. For the IT sector, staff costs
have only slightly increased even as headcount has reduced for top IT companies.
The CU has not improved, and the interest coverage rate of non-IT service sector
companies remains low, though above unity. Looking ahead, RBI’s enterprise survey
indicates a moderate improvement in demand parameters regarding turnover and
employees. The CU at 74.2 per cent in Q2:2024-25 is above the long-run average.

42. It is in this context that the Economic Survey 2024-25 has projected the GDP
growth to be 6.4% in FY25 and between 6.3% and 6.8% in FY26. As per the first
Advanced Estimates, the real and nominal GDP are expected to grow at 6.4% and
9.7%, respectively, in FY25. In FY26, the nominal GDP is projected to grow by 10.1%.
These figures underscore the downward trajectory on the inflation front.

43. Subdued private consumption due to a low growth rate of real wages is a factor
behind the slowdown. However, excessively contractionary monetary policy has
aggravated the problem. High interest rates and regulatory tightening have brought
down the credit growth rate. The growth rate for bank credit has declined from 15.6%
(y-o-y) in December 2023 to 12.4% in December 2024. This puts downward pressure
on demand growth for several segments of the economy.

8
44. The moderated demand is often cited as the reason behind the slow recovery
in private capex in this sector. While demand expectations are important for
investment decisions, the high interest rates have raised the risk premium assigned to
capital investments. This seems to be a leading factor behind the noticeable slowdown
in the flow of funds to the commercial sector. Total costs of bank/FIs-funded projects
have seen no appreciable increase. The aggregate bank credit growth rate remains
low at 12.4% in December 2024. The rate for industry is even lower (7.4%) under very
tight financial conditions overall.

45. The Union Budget 2025 has given a push to demand. However, demand push
will not result in higher private capex unless interest rates are reduced immediately.
The difference between the core inflation, excluding gold and silver (<4%), and the
policy rate (at 6.5 %) has been more than 2.5% for the past year. This means the
capex-relevant real interest rate is significantly greater than the growth-neutral real
interest rate, R-star. Very high effective real interest rates for capital goods are a drag
on private capex and a leading factor why the investment rates remain below what is
needed for a high growth rate.

46. With reference to CPI inflation also, the policy rates are more than two
percentage points higher than the CPI inflation forecast for the next five quarters – Q4:
2024-25 at 4.4 per cent, Q1: 2025-26 at 4.5 per cent, Q2: 2025-26 at 4.0 per cent, Q3
at 3.8 per cent and Q4 at 4.2 per cent; and FY: 2025-26 is at 4.2%. Undoubtedly, the
present MP is contractionary.

47. 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.

48. Given the demand boost from Budget 2025, a rate cut powered by a
commensurate increase in liquidity will decrease the risk premium demanded by
investors, thereby boosting private investment to support growth. By reducing the cost
of capital, the rate cut can increase the commercial viability of the public-private
partnership schemes for warehouses, cold storage, and infrastructure logistics. By
reducing the wastage of fruits and vegetables (the significant causes of inflation), such
investments can help induce a virtuous cycle of faster growth and lower inflation.

49. Low core inflation strengthens the case for a rate cut, especially when food
price inflation is expected to moderate further. To the extent that inflation risk arises
from food prices, it is expected to have a limited impact on core inflation. During the
last five quarters, the CPI core, excluding petrol, diesel, gold and silver, has remained
mostly below the price inflation target of 4%.

50. In contrast, during the last ten years, including the eight years under the flexible
inflation targeting framework of 2016, repo rates have had no significant effect on food
prices or their volatility. This lends credence to the claims that food inflation is a
primarily supply-side phenomenon.

51. Additionally, the persistent duality in the CPI – that is, a significant and
persistent divergence between the food and core inflation levels in recent years – calls
for the MPC to see through the fluctuations in food prices while setting policy rates.

9
Further, food prices should be viewed in the broader context of the income-boosting
effect of growth and the reduced share of food in the consumption basket, as is evident
from the two consecutive rounds of HCES in 2023 and 2024.

52. Admittedly, a rate cut carries risks, too. It will reduce the interest rate
differentials between India and the advanced economies (AEs). This, in principle, can
increase outflows, putting pressure on the exchange rate. This, in turn, can result in
imported inflation. Going by the data, this seems to be a rather low-probability
scenario. During the last five years, the benchmark rate differentials between India
and AEs have decreased. For instance, vis-à-vis the US, the policy rate differentials
have decreased from almost 4% in 2020 to about 1.5% in September 2024 till the US
Fed started rate cuts – the real policy rate differentials have also changed significantly.
The increased differentials did not adversely affect inflows of USD, very likely due to
strong growth fundamentals.

53. In the short run, several factors, including global uncertainty, can change the
direction and quantum of capital flows. Interestingly, the recent months have
witnessed outflows even as interest differentials between India and most of the AEs
increased in the aftermath of rate cuts by the US Fed and other central banks starting
September 2024. In any case, as most major economies have already reduced their
interest rates, even accounting for the impact of interest rate differences, there is room
for us to reduce policy rates without adversely affecting the foreign exchange flows.

54. The risk of imported inflation also does not seem very high. On one hand, some
adjustments in the INR-USD exchange rate cannot be ruled out. On the other hand,
according to the World Bank’s Commodity Markets Outlook, oil prices and other
commodities are expected to decrease risk in CY 2025 and 2026. The effect of tariff
hikes on India is difficult to predict. Overall, the risk of imported inflation appears to be
low.

55. Considering the trade-offs discussed above, I vote to:

• Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25
basis points to 6.25 per cent.
• Maintain the monetary policy stance as ‘neutral’.

Statement by Dr. Rajiv Ranjan

56. In my statement of August 2024, when June inflation number of 5.1 per cent
was available and we were expecting around 4 per cent inflation numbers in July and
August 2024, I had said that positive developments on inflation and growth front could
open the window for monetary policy to change its course. But at the same time, more
clarity and definiteness were needed as we were anticipating some price shocks in
September and October, which turned out to be much higher than projected, delaying
the opening of the window. In December, when the October number was available at
6.2 per cent, above the tolerance band, it was not credible and optical to ease policy
rates. Thus, we preferred to stay the course and remain cautious and watchful for
these uncertainties to play out.

10
57. Under the circumstances, we sequenced our policy measures – shifting the
monetary policy stance from ‘withdrawal of accommodation’ to ‘neutral’ in October
2024 thereby enhancing the flexibility to act and subsequently reducing the CRR in
December 2024 to release durable liquidity. 5 In fact, we also made a very subtle
change in October 2024 in the wording of our stance given in the MPC resolution from
“…a durable alignment of inflation to the target” to “…a durable alignment of inflation
with the target” – implying more flexibility in our approach. Perhaps, this went
unnoticed.

58. Globally also, as compared to the highly synchronous tightening phase in a


world grappling with elevated inflation, there is now a hesitant, guarded, divergent and
discontinuous rate cut cycle under progress. Uncertainty has been high due to
elevated trade fragmentation concerns, persistent geopolitical tensions and slowing
disinflation. Definitely, our decisions are guided by domestic growth-inflation trade-
offs, while remaining attentive to global developments.

59. In line with the sequencing path that we followed, a policy rate cut in February
2025 is the most rational and appropriate next step as we now have greater confidence
on the disinflation path. In line with this prognosis, we also prepared the market by
infusing sufficient liquidity for better transmission. The baseline projections suggest
headline inflation to average at 4.2 per cent during 2025-26. Oil and other global
commodity prices are expected to remain rangebound. On the other hand, growth slow
down concerns are more evident today.

60. It needs to be emphasised that India’s forte is its immense growth opportunities
and strong macroeconomic fundamentals. There is a need to preserve the high growth
momentum over the medium term, necessitating monetary policy to be sensitive to the
evolving growth scenario and use various policy instruments including liquidity
injection to reinvigorate growth. Capital flows to India are driven more by its distinctive
growth story rather than interest rate differentials, a phenomenon observed for many
EMEs. 6 Reviving growth and building on resilience is an imperative, especially at a
country specific level. Interest rate defence of exchange rate could turn out to be
counter-productive especially during periods of global tide towards outflows driven by
factors that do not differentiate across nations such as the risk-taking propensity of
global investors or uncertainty driving reserve currency strength. 7

61. The Union Budget 2025-26 has also prepared the ground for a counter cyclical
push to growth, which can then be complemented by monetary policy. The
commitment to pursue fiscal consolidation in the next five years coupled with
proposals for strengthening agriculture and achieving self-sufficiency in pulses and
rationalisation of duty structures will be supportive of price stability and help in
anchoring of inflation expectations over the medium term. Moreover, the adherence to
fiscal consolidation and debt path without compromising on the quality of expenditure
will help in improving country ratings, attracting flows, easing financial conditions, and
improving overall sentiment and outlook. Well-coordinated fiscal and monetary policy

5
This was followed by a number of measures in January 2025 to release sufficient system liquidity.
6
Aizenman J, Park D, Qureshi I, Saadaoui J and Uddin G (2024), “The Performance of Emerging Markets During the Fed’s Easing and
Tightening Cycles: A Resilience Analysis Across Economies, Asian Development Bank, August
(https://www.adb.org/publications/emerging-markets-fed-easing-tightening-cycles)
7
Gelos G., Patelli P., & Shim I. (2024), “The US dollar and Capital Flows to EMEs, BIS Quarterly Review, September
(https://www.bis.org/publ/qtrpdf/r_qt2409d.htm).

11
working in tandem could undoubtedly generate improved outcomes in terms of better
growth-inflation balance.

62. To sum up, 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. Coupled with Government measures to boost
consumption in the Union Budget, monetary policy easing will support higher
aggregate demand. Heightened global uncertainty, however, persists, necessitating
the need to continue with neutral stance to retain flexibility to act appropriately as per
the evolving situation. Accordingly, I vote for a reduction in the policy repo rate by 25
bps while maintaining the neutral stance.

Statement by M. Rajeshwar Rao

63. There has been a shift in the domestic growth inflation balance since the
December 2024 policy – while the inflation registered sequential softening, growth
outcomes were weaker. Heightening uncertainties, emanating from the global financial
markets and trade policies too cloud the outlook for domestic growth and inflation.

64. Real GDP growth in 2024-25 at 6.4 per cent (y-o-y) was below expectations,
with weak capital formation proving a drag, even while private consumption registered
a rebound. Growth projections for the first half of 2025-26, given in the December 2024
resolution have been scaled down by 20 bps and 30 bps, respectively, for Q1 and Q2.
On the whole, real GDP growth is projected to edge up to 6.7 per cent in 2025-26.
Household consumption growth will be supported by robust agricultural outlook, stable
consumer confidence and tax relief in the Union Budget. Rising capacity utilisation,
healthy corporate and bank balance sheets, and improving business sentiments, set
up conducive conditions to support pickup in private investment. At the same time,
protracted uncertainty in the external environment – particularly volatile financial
markets and rising protectionist trade policies – could dampen growth impulses.

65. The inflation outlook is turning out to be more benign. Food inflation at present
is the predominant driver of headline inflation, contributing to around 70 per cent of the
overall inflation in December (food group has a weight of 45.86 per cent in the CPI
basket). A correction in food inflation is necessary for a durable softening of headline
inflation. Reassuringly, recent data is signalling a favourable rabi season. This, along
with the kharif market arrivals and the ongoing winter season correction in vegetables
prices, should lead to a significant easing of food inflation pressures in the coming
months. Core inflation (inflation in CPI excluding food and fuel) pressures are also
expected to remain muted. The headline inflation is projected to average 4.2 per cent
during 2025-26 down from 4.8 per cent in 2024-25. At the same time, considerable
upsides to the baseline inflation projections remain, particularly from adverse weather
events impacting rabi crop yields and risks of rising imported inflation on account of
volatility in financial markets.

66. Monetary policy amidst the challenges posed by COVID-19, Ukraine war and
the recurring domestic food price shocks, has been able to effectively maintain the
growth-inflation balance, in line with its primary objective of price stability while keeping
in mind the objective of growth. At the current juncture, with a further alignment of
headline inflation towards the 4 per cent target, there is greater space to address

12
concerns regarding growth by way of reduction in the policy repo rate. This monetary
policy measure in conjunction with the fiscal measures announced in the Budget
should give a fillip to aggregate demand conditions. Furthermore, Government has
reaffirmed its commitment to fiscal consolidation, which should help to anchor
medium-term inflation expectations. The liquidity measures – CRR reduction in
December 2024 as well as a slew of other measures taken in January 2025 to meet
the durable liquidity requirements of the banking system, have created conditions
conducive to help in transmission of the rate cut.

67. The current environment is replete with uncertainties which calls for
watchfulness, coupled with alertness and nimbleness in response. Monetary policy at
this juncture has to maintain the required flexibility to pro-actively address emerging
risks to the growth-inflation balance. This necessitates a continuation of the neutral
stance in the February policy.

68. Accordingly, I vote for a cut in the policy repo rate by 25 basis points to 6.25
per cent and to retain the neutral stance.
Statement by Shri Sanjay Malhotra

69. In a world order dominated by continuing geopolitical tensions and elevated


trade and policy uncertainties, monetary policy, as the guardian of macroeconomic
and financial stability, is traversing through a challenging time. It has to balance a
multitude of pressure points and continuously evolving policy trade-offs. Stronger
policy frameworks and robust macro fundamentals remain the key to resilience and
fostering overall macroeconomic stability. Domestically too, there is a need to preserve
the high growth momentum, while maintaining price stability, necessitating monetary
policy to use various policy instruments to maintain the inflation-growth balance.

70. Headline inflation, after moving above the upper tolerance band in October, has
moderated in November and December. Going forward, food inflation pressures are
likely to see significant easing on robust kharif harvest arrivals, winter season
correction of vegetables prices and a promising rabi crop outlook. The food inflation
outlook is turning decisively positive. Moreover, the budget proposals on agriculture
and the commitment to fiscal consolidation, among others, are positive for price
stability and would help to anchor inflation expectations over the medium term. These
would provide greater impetus to disinflation of headline CPI and its eventual
alignment with the target rate in FY 2025-26. CPI inflation for Q4 is projected at 4.2
per cent and that for the financial year 2025-26 at 4.2 per cent.

71. The real GDP growth for the current year is estimated at 6.4 per cent, a softer
expansion after a robust 8.2 per cent growth last year. Even though, the GDP growth
is expected to recover in the second half of 2024-25 and 2025-26 from 6.0 per cent
recorded in the first half of 2024-25, the growth rate projected by various forecasts for
2025-26 vary from 6.3 to 6.8 per cent. This will be supported by healthy rabi prospects
and an expected recovery in industrial activity. From the demand side, consumption
and investment are also expected to improve.

72. Given the macroeconomic outlook when inflation is expected to align with the
target, and recognising that monetary policy is forward-looking, I view a lower policy
rate to be more appropriate at the current juncture. Accordingly, I vote for a reduction
13
in the repo rate by 25 basis points. Monetary policy easing, coupled with good
agricultural sector growth and various growth supportive measures in the Union
Budget, would boost household consumption, investment in housing, capital
expenditure, etc thereby strengthening the pick-up in aggregate demand.

73. At the same time, rising uncertainties on global financial markets and trade
policy front, coupled with continuing risk of adverse weather events pose risks to the
inflation and growth outlook. We need to be watchful of how these forces play out.
Hence, I vote to continue with the neutral stance of monetary policy. This will provide
the flexibility to respond to the evolving macroeconomic environment. By taking this
logical course, monetary policy will be able to fulfil its mandate and play its part in the
sustainable development of the Indian economy.

(Puneet Pancholy)
Press Release: 2024-2025/2219 Chief General Manager

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