Reserve Bank of India (RBI) Governor Sanjay Malhotra explained on Friday that the decision to cut the repo rate during the February monetary policy committee (MPC) meeting was driven by inflation aligning with the target, as well as the forward-looking nature of monetary policy.
The RBI has forecasted the consumer price index (CPI) inflation to be 4.2 per cent for both the fourth quarter of the current fiscal year and for FY 2025-26.
Malhotra also indicated that food inflation pressures are expected to ease significantly, supported by strong kharif harvest arrivals, a winter season correction in vegetable prices, and a favourable rabi crop outlook.
Food Inflation
“The food inflation outlook is turning decisively positive. These factors will contribute significantly to the disinflation of headline CPI and its eventual alignment with the target rate in FY 2025-26,” Malhotra noted, reported Business Standard.
The February meeting of the Monetary Policy Committee (MPC), the first chaired by Malhotra, saw a 25 basis point (bps) reduction in the policy repo rate, bringing it down to 6.25 per cent — the first cut in five years.
Commenting on the policy easing, Malhotra highlighted that growth in the farm sector and demand-boosting measures in the Union Budget would contribute to aggregate demand. However, he also expressed concern over rising uncertainties in global financial markets and trade policies, as well as the ongoing risk of adverse weather events, which could challenge both inflation and growth.
“We need to be watchful of how these forces play out,” he said.
Inflation Outlook
Deputy Governor M Rajeshwar Rao echoed these sentiments, noting that the current environment is fraught with uncertainties, necessitating caution, alertness, and a flexible response. However, he agreed that the inflation outlook is becoming increasingly favourable, according to the report.
He stated that the series of liquidity measures, including the reduction in banks’ cash reserve ratio (CRR), have created favourable conditions for the effective transmission of the rate cut.
“This monetary policy measure, in conjunction with the fiscal measures announced in the Budget, should stimulate aggregate demand conditions. Furthermore, the government has reaffirmed its commitment to fiscal consolidation, which should help to anchor medium-term inflation expectations,” he said.
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