For the first time in close to five years, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has cut the repo rate – the rate at which it lends to banks – by 25 basis points to 6.25%. since February 2023. It had cut the repo rate last in May 2020 by 40 basis points to 4% and held it at that level till May 2022. Since then, the RBI had been raising the repo rate steadily till February 2023. Since February 2023, it has kept the rate unchanged at 6.50% until February 2025.

“The MPC noted that inflation has declined. Supported by a favourable outlook on food and continuing transmission of past monetary policy actions, it is expected to further moderate in 2025-26, gradually aligning with the target. The MPC also noted that though growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target,” RBI Governor Sanjay Malhotra said in a statement explaining the rationale for the rate cut.

The MPC is a six-member empowered committee constituted by the central government and comprises the RBI Governor, a Deputy Governor, an officer of the RBI, an economist and two independent members appointed by the government. All MPC members have one vote, and in the event of an equality of votes, the Governor has a second or casting vote. All members of the MPC are required to write a statement specifying the reasons for voting in favour of, or against the proposed resolution.

When it comes to growth numbers, after the previous MPC meeting in December 2024, the RBI had announced real GDP growth of 6.6% for the current financial year against 7.2% announced in October 2024. However, first advance GDP estimates for FY25 released by the National Statistics Office (NSO) in January 2025 have pegged the country’s growth for this financial year at 6.4%. For the next financial year, the RBI has projected real GDP growth to be at 6.7%.

On inflation, the MPC anticipates a softening while being mindful of global financial volatility and weather conditions. It has projected Consumer Price Index (CPI) inflation for the current financial year at 4.8%. After a 14-month-high in October 2024 at 6.21%, CPI inflation had moderated to a four-month low in December 2024 at 5.22%.

“Going ahead, food inflation pressures, absent any supply side shocks, should see a significant softening due to good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects. Core inflation is expected to rise but remain moderate. Rising uncertainty in global financial markets coupled with continuing volatility in energy prices and adverse weather events presents upside risks to the inflation trajectory,” Malhotra said in the statement.

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