RBI Monetary Policy Committee Pauses Rate Cuts, Holds Repo Rate at 5.25%
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announced on Friday that it has decided to maintain the repo rate at 5.25%. This decision represents a pause in the central bank's rate-cutting cycle, following a 25 basis points reduction implemented during the December meeting. One basis point is equivalent to one-hundredth of a percentage point.
Market Expectations and Committee Decision
A recent Mint survey of ten economists revealed that nine out of ten respondents accurately anticipated this pause at 5.25%, while only one economist forecasted a further 25-basis-point cut to 5%. The MPC also unanimously voted to retain its neutral monetary policy stance, a strategic position that provides the flexibility to adjust rates in either direction based on evolving economic data.
"After a detailed assessment of the current economic conditions, the MPC has resolved to keep the policy rate unchanged at 5.25%," stated the RBI Governor. He further emphasized that "the near-term domestic inflation and growth outlook remain positive," reinforcing the rationale behind the committee's cautious approach.
External Factors and Currency Relief
In a significant development for India's economic landscape, the recently finalized India-US trade agreement has provided substantial relief to the central bank. The deal reduces tariffs from the current 50% to a more favorable 18%, thereby alleviating pressure on the Indian currency. Analysts now project that the rupee could gradually strengthen back to the 90-levels, having recently touched 92 against the US dollar.
MPC Composition and Economic Context
The six-member Monetary Policy Committee comprises three external experts and three RBI officials:
- External Members: Nagesh Kumar, Saugata Bhattacharya, and Ram Singh
- RBI Representatives: Governor Sanjay Malhotra, Deputy Governor Poonam Gupta, and Executive Director Indranil Bhattacharyya
This decision comes against the backdrop of robust economic performance. India's economy surprised analysts by posting an impressive 8.2% growth rate for the quarter ending September, significantly exceeding the RBI's own projection of 7% and marking the highest growth in six quarters.
Inflation Dynamics and Previous Policy Moves
Recent inflation data shows retail inflation, measured by the Consumer Price Index, increased to 1.33% in December from 0.71% in November. The MPC operates under a flexible inflation targeting framework that aims to maintain retail inflation at 4%, with an acceptable tolerance band of +/-2 percentage points.
In December 2023, the RBI had implemented a 25-basis-point rate cut, describing the economic environment as a "rare goldilocks period" characterized by strong growth and manageable inflation. This move surprised market participants who had largely expected a pause at that time, highlighting the MPC's data-dependent approach to monetary policy decisions.
