RBI cuts repo rate to support growth.

Source: The post RBI cuts repo rate to support growth. has been created, based on the article “Growth over inflation: The interest rate cut signals a shift in the RBI’s immediate priorities” published in “The Hindu” on 8th February 2025.

UPSC Syllabus Topic: GS Paper3- Indian Economy and issues relating to planning, mobilisation of resources, growth Development

Context: The RBI cut the repo rate from 6.50% to 6.25% to support growth. Inflation fell to 5.2%, but growth is slow. Global economic risks remain. The RBI expects inflation to ease. The policy aligns with the Budget. A scheduling change could improve decision-making.

Why did the RBI cut the repo rate?

1. The RBI reduced the repo rate from 6.50% to 6.25%, the first cut in nearly five years. This decision prioritizes economic expansion over inflation control.
2. In the previous bi-monthly review, the MPC had opted for the status quo with a 4:2 vote. At that time, inflation was 6.2% (October 2023), and GDP growth was 5.4% (Q2 2023-24).
3. Now, inflation has moderated to 5.2% (December 2023), but growth projections for 2024-25 have slipped to 6.4%, the lowest in four years.

What global and domestic factors influenced this decision?

1. Globally, stalled disinflation, a strong U.S. dollar, and diminished prospects of U.S. rate cuts have put pressure on emerging markets, including India and the rupee.
2. Domestically, inflation is expected to average 4.8% in 2024-25 and 4.2% in 2025-26, based on assumptions of a normal monsoon and a bumper harvest of key vegetables (tomato, onion, potato), which historically cause price spikes.

How does the policy align with the government’s economic strategy?

1. The RBI’s post-Budget stance indicates closer coordination with fiscal policy.
2. The government has called for monetary and fiscal policies to work in tandem.
3. The rate cut is expected to stimulate consumption, attract private investment, and boost growth, though its effectiveness remains uncertain.

Should the RBI change its review schedule for better decision-making?

1. Had the MPC met a week later, it might have had additional justification for the rate cut, as January inflation was expected to cool to around 4.5%.
2. A slight adjustment in the MPC’s bi-monthly meeting schedule could make monetary policy more data-driven and responsive, helping the committee base decisions on real-time economic indicators.

Question for practice:

Evaluate whether the RBI’s decision to cut the repo rate aligns with both domestic economic conditions and global economic trends.