RBI Makes Bold Rate Cut to Bolster Growth; Governor Malhotra Emphasizes Economic Boost

The Reserve Bank of India (RBI) has announced a significant cut in its key interest rate, a decisive move aimed at invigorating economic growth amidst a favorable inflation outlook. The minutes of the latest Monetary Policy Committee (MPC) meeting, released on Friday, revealed a strong consensus among members to prioritize growth support.

RBI Governor Sanjay Malhotra, alongside MPC members Nagesh Kumar, Ram Singh, Rajiv Ranjan, and Poonam Gupta, voted to reduce the policy repo rate by 50 basis points (bps) to 5.50%. While Saugata Bhattacharya favored a more cautious 25 bps cut, the majority's decision signals a clear intent to provide a substantial boost to the economy.

This latest reduction marks a cumulative 100 bps cut in quick succession since February, leaving limited room for further monetary policy interventions to support growth under current circumstances. Consequently, all six MPC members unanimously agreed to shift the policy stance from 'accommodative' to 'neutral'.

Governor Malhotra articulated the rationale behind the bold move, stating that while growth remains steady, it falls short of national aspirations. He also noted a more benign inflation outlook than initially anticipated in the April policy review. "The growth forecast remains the same as the outturn of last year, which was 6.5%. On the whole, I believe that, given the current macroeconomic conditions and the outlook, monetary policy needs to support growth, while remaining consistent with the objective of price stability," Malhotra explained.

He further highlighted that the post-Covid economic recovery, particularly in investment, has been primarily driven by public spending. Private sector investments, despite high capacity utilization and improved corporate balance sheets, have remained weak. Malhotra added that heightened global uncertainties might cause businesses to defer investment decisions, underscoring the critical need for growth-supportive policies.

MPC Members Weigh In on the Decision

Nagesh Kumar stressed that a "heavier-than-expected cut in policy rate" would send a clear message about India's commitment to supporting economic growth momentum and willingness to deploy necessary policy interventions. He also pointed out that the challenging global environment is likely to complicate the economic growth outlook for 2025-26, especially impacting the manufacturing sector and job creation, thus necessitating both fiscal and monetary policy support.

While Saugata Bhattacharya agreed on the need for growth support, he advocated for a more measured and cautious approach to policy easing given the prevailing uncertainties.

Ram Singh addressed concerns about the interest rate differential with the US Fed, noting that a 50 bps cut would reduce it to recent lows, potentially putting short-term pressure on the rupee. However, he expressed confidence that India's robust economic fundamentals, including a comfortable current account situation, would likely confine any rupee pressure to the short run. Singh also believes that a pick-up in growth could more than offset any adverse effects from reduced interest rate differentials. He also emphasized that a 50 bps cut would not lead to an overheating economy, as there are no signs of demand-pull inflation. He further noted that early monsoon onset had no visible adverse impact on vegetable prices and that declining edible oil prices, bolstered by a recent import duty reduction, would strengthen the benign inflation outlook.

Newly appointed MPC member Poonam Gupta echoed the sentiment that with headline inflation aligning with the target, there is ample room for monetary policy to support the economy. She agreed that a 50 basis point rate cut would foster policy certainty and ensure faster transmission, proving more effective in countering global economic challenges than a staggered approach.

Rajiv Ranjan concluded that the 50 bps rate cut, combined with various liquidity measures by the RBI and a planned CRR cut from September, would empower banks to boost credit growth while safeguarding their margins in a rate-easing cycle.