RBI Cuts Repo Rate Amid Global Economic Uncertainty
In a significant move, the Reserve Bank of India (RBI) has reduced the key policy repo rate by 25 basis points to 6%. This decision, announced by RBI Governor Sanjay Malhotra, comes as the Monetary Policy Committee (MPC) adjusts its GDP growth outlook for FY 2025-26 from 6.7% to 6.5%. The MPC’s shift from a neutral to an accommodative stance indicates a commitment to support economic growth amid challenging global conditions.
MPC’s Decision to Cut Repo Rate
The MPC’s unanimous decision to lower the repo rate reflects concerns over India’s economic growth prospects. Governor Malhotra highlighted that inflation is currently below the target, aided by a significant drop in food prices. The committee noted a favorable inflation outlook of 4% for the current financial year. This adjustment aims to bolster economic activity, especially as the global economic landscape remains volatile due to external factors, including trade tariffs imposed by the U.S. on Indian goods.
The MPC’s statement emphasized the need for a supportive monetary policy in light of the current growth-inflation trajectory. The committee aims to foster non-inflationary growth while maintaining a balance between demand and supply. The decision to adopt an accommodative stance suggests that future meetings may either maintain the current rate or consider further cuts, depending on economic conditions.
Global Economic Challenges
The backdrop of the MPC’s decision is marked by rising global economic uncertainties. The recent imposition of a 26% reciprocal tariff on Indian goods by the Trump administration has raised concerns about a potential trade war, which could lead to a broader economic slowdown. Governor Malhotra cautioned that these developments pose new challenges for global growth and inflation, necessitating a proactive approach from the RBI.
Despite these challenges, the MPC remains optimistic about the resilience of India’s services exports, which are expected to withstand the pressures of the evolving global economic environment. However, merchandise exports may face significant headwinds, underscoring the need for a robust domestic economic strategy.
Focus on Growth and Inflation
The RBI’s commitment to supporting growth while being vigilant about inflation reflects a careful balancing act. The MPC acknowledged that while risks to growth are evenly balanced, uncertainties remain high due to global volatility. The committee’s approach aims to ensure that monetary policy remains conducive to economic recovery, particularly after a lackluster performance in the first half of FY 2024-25.
Governor Malhotra reiterated the importance of maintaining a clear and consistent policy framework that prioritizes the economy’s best interests. The RBI’s focus on fostering an environment conducive to growth, while keeping inflation in check, is crucial for sustaining macroeconomic stability in the face of external pressures.
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