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?
- 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.
- 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).
- 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?
- 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.
- 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?
- The RBI’s post-Budget stance indicates closer coordination with fiscal policy.
- The government has called for monetary and fiscal policies to work in tandem.
- 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?
- 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%.
- 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.
