RBI Governor Sanjay Malhotra announced the first bi-monthly monetary policy of the current fiscal. File
| Photo Credit: Reuters
The Reserve Bank of India slashed the repo rate by 25 basis points to 6% on Wednesday, with its Monetary Policy Committee voting unanimously to reduce the policy rate in a bid to support growth and bring down the interest burden on home, auto, and other loan borrowers. However, this will also reduce the interest earned on savings by depositors.
The move comes against the backdrop of an escalating global trade war, triggered by U.S. President Donald Trump’s wide-ranging tariffs. The MPC has also lowered its forecast for India’s GDP growth this year, from 6.7% to 6.5%.
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This is the second time in a row that the MPC has cut the repo rate by 25 basis points (bps) or 0.25%. The committee, headed by RBI Governor Sanjay Malhotra, also unanimously shifted its policy stance from neutral to accommodative, indicating that it is more worried that economic growth could be a casualty of the trade war, than about inflation. This is a policy stance “geared towards stimulating the economy through softer interest rates,” Mr. Malhotra said, signalling the likelihood of further rate cuts.
Growth impact
“Uncertainty in itself dampens growth by affecting investment and spending decisions businesses and households,” Mr. Malhotra said, in a monetary policy statement explaining the situation. “Second, the dent on global growth due to trade friction will impede domestic growth. Third, higher tariffs shall have a negative impact on our exports,” he said.
“There are, however, several known unknowns — the impact of relative tariffs, the elasticities of our export and import demand; and the policy measures adopted by the Government, including the proposed Foreign Trade Agreement with the USA, to name a few. These make the quantification of the adverse impact difficult,” Mr. Malhotra emphasised.
Inflation risks
The risks to inflation, on the other hand, are two-sided, he pointed out. “On the upside, uncertainties may lead to possible currency pressures and imported inflation. On the downside, slowdown in global growth could entail further softening in commodity and crude oil prices, putting downward pressure on inflation,” he said.
“Overall, while global trade and policy uncertainties shall impede growth, its impact on domestic inflation, while requiring us to be vigilant, is not expected to be of high concern,” he added.
Uncertain forecasts
Taking various factors into consideration, real GDP growth for 2025-26 is now projected at 6.5% (down from the 6.7% projected in February), with a first quarter growth forecast of 6.5%, and the subsequent three quarters at 6.7%, 6.6%, and 6.3% respectively.
“While the risks are evenly balanced around these baseline projections, uncertainties remain high in the wake of the recent spike in global volatility,” the RBI Governor said.
Taking various factors into consideration, and assuming a normal monsoon, CPI inflation for the financial year 2025-26 is projected at 4%, with Q1 at 3.6%, Q2 at 3.9%, Q3 at 3.8%, and Q4 at 4.4%. The risks are evenly balanced.
Noting that the global economy was going through a period of exceptional uncertainties, he said, “The difficulty to extract signal from a noisy and uncertain environment poses challenges for policy making. Nevertheless, monetary policy can play a vital anchoring role in ensuring that the economy remains on an even keel.”
Aiming for non-inflationary growth
Mr. Malhotra added that the domestic growth-inflation trajectory demanded monetary policy that is growth supportive, while being watchful on the inflation front.
“We are aiming for a non-inflationary growth that is built on the foundations of an improved demand and supply response and sustained macroeconomic balance. As before, we shall remain agile and decisive in our response and put in place policies that are clear, consistent, credible and in the best interest of the economy,” he concluded.
The repo rate cut means that the standing deposit facility (SDF) under the liquidity adjustment facility (LAF) will stand adjusted to 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25%.
Published – April 09, 2025 09:42 am IST
