Reserve Bank of India Governor Sanjay Malhotra has emphasised the need for lower real interest rates, pointing to a favourable inflation forecast. This key argument was central to his vote for a policy rate reduction, as revealed in the recently published minutes of the December Monetary Policy Committee meeting.
Key Arguments for Rate Cut and Stance
Governor Malhotra detailed that with minimal demand pressures evident from low core inflation, the outlook for both headline and core inflation remains benign. He explicitly stated that real interest rates need to be lower under these conditions. Consequently, he voted for a 25-basis-point cut in the repo rate. The MPC unanimously agreed, lowering the key rate to 5.25%, marking a cumulative reduction of 125 bps since February 2025.
On the policy stance, the committee maintained a neutral position by a 5:1 majority. Malhotra favoured retaining this neutral stance, arguing it provides the necessary flexibility to remain data-dependent and respond to evolving macroeconomic conditions. One member, Ram Singh, voted for a shift to an 'accommodative' stance.
Inflation and Growth Dynamics
The minutes highlight the recent inflation trajectory. India's CPI inflation rose to 0.71% in November from a record low of 0.25% in October. Despite this uptick, the outlook is considered manageable. Deputy Governor Poonam Gupta noted the faster-than-anticipated moderation in headline inflation as a crucial development, suggesting it should carry significant weight in policy decisions.
On growth, Malhotra observed that while domestic economic activity remains resilient in the third quarter, some high-frequency indicators show weakness. This suggests a deceleration in growth momentum in the second half (H2) of FY25 compared to the first half (H1). Despite this expected moderation, he projected real GDP growth to exceed 7% for the year, surpassing the RBI's initial expectation of 6.5%. For the first half of the next fiscal year, he forecasted strong domestic growth, though moderating to a range of 6.7-6.8%.
Views from Other MPC Members
Other committee members echoed the rationale for supportive monetary policy. External member Saugata Bhattacharya indicated that cumulative rate cuts and liquidity measures have moved monetary policy from mildly restrictive to balanced. He believes the current policy rate is now consistent with macroeconomic stability.
RBI Executive Director Indranil Bhattacharyya, who also voted for the cut and a neutral stance, argued that with a muted inflation outlook indicating absent demand pressures, the MPC should support growth, especially as it is projected to decelerate. He added that the neutral stance preserves flexibility to respond judiciously while avoiding precommitment pitfalls.
Member Ram Singh advocated for a more dovish stance, suggesting the rate cut should have been accompanied by a shift to 'accommodative' to support growth momentum, given dormant price pressures.
The minutes collectively paint a picture of a central bank cautiously supporting growth amid a favourable inflation environment, while maintaining ample flexibility to navigate future uncertainties on both domestic and external fronts.
