RBI Policy Minutes: Governor Supports Neutral Stance on Rate Cuts

RBI Governor Sanjay Malhotra has emphasized the importance of a front-loaded interest rate cut to enhance clarity and confidence among economic agents amid ongoing global volatility. According to the minutes from the June monetary policy meeting released on Friday, the Monetary Policy Committee (MPC) decided to cut the repo rate by 50 basis points, marking the second consecutive reduction and a total decrease of 100 basis points. The MPC also shifted its stance from ‘accommodative’ to ‘neutral’ while introducing liquidity measures to support economic growth.

Monetary Policy Committee’s Decision

During the MPC meeting on June 6, five out of six members voted in favor of a 50 basis point cut to the repo rate. This decision reflects a proactive approach to stimulate economic activity. However, external member Saugata Bhattacharya advocated for a more cautious 25 basis point reduction due to the prevailing uncertainties in the global economy. The committee’s shift to a neutral stance allows for greater flexibility in future monetary policy decisions, enabling the possibility of further cuts or adjustments based on incoming economic data and global conditions.

Impact on Inflation and Economic Growth

Governor Malhotra pointed out that inflation is projected to ease from 6.2% in October 2024 to 3.2% in April 2025, with an average expected rate of 3.7% for the year. He stated that the front-loaded rate cut, combined with assured liquidity measures, would send a strong signal to economic agents, thereby fostering consumption and investment through lower borrowing costs. This strategic approach aims to provide certainty during uncertain times and is anticipated to bolster economic growth.

Diverse Opinions Among Committee Members

The MPC’s decision was not without dissent. External member Ram Singh expressed concerns about the uncertain global growth and inflation trends, suggesting that a staggered approach to rate cuts might be more prudent to avoid delaying demand and investment decisions. Bhattacharya reiterated the need for a cautious approach, advocating for measured policy easing in light of existing uncertainties. Meanwhile, Deputy Governor Poonam Gupta and Executive Director Rajiv Ranjan supported the 50 basis point cut, emphasizing its role in signaling policy certainty and enhancing the transmission of monetary policy.

Future Outlook and Next Meeting

The MPC’s next meeting is scheduled for August, where further assessments of economic conditions will take place. External member Nagesh Kumar highlighted the challenges of weak transmission and slow credit growth, particularly in public sector banks. He noted that a significant rate cut could lead to lower lending rates, potentially stimulating investment and consumption of durable goods. As the economic landscape continues to evolve, the MPC’s decisions will play a crucial role in shaping India’s monetary policy and economic trajectory.

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