February 2024 RBI MPC minutes shows cautious optimism on rate cuts

24 Feb 2025 , 02:21 PM

RATE CUT IN FEBRUARY; BUT HOW MUCH MORE?

The RBI Monetary Policy Committee (MPC), in its Feb 05-07 meeting, cut repo rates by 25 bps to 6.25%. This lowered the SDF rate also by 25 bps to 6.00%, while the MSF rate / Bank rate was also reduced by 25 bps to 6.50%. The FY26 GDP growth projection has been placed by the RBI MPC at 6.7% for FY26, which is better than the first advance estimates (FAE) of FY25 GDP growth at 6.4%. Overall, the message is that FY26 is likely to see lower inflation and better economic growth, although the tariff war could queer the pitch.

The decision to cut repo rates by 25 bps in the February 2025 MPC meeting was unanimous with all the 6 members of the MPC voting in favour of a 25 bps repo rate cut. However, there was no change in the stance of the policy, which was retained at Neutral. There has been little guidance on the trajectory of rates, since the members opted to be cautiously optimistic about further rate cuts. However, post the latest Jan-25 inflation reading at 4.22%, it looks highly likely that the RBI would cut repo rates by another 25 bps in Apr-25.

• NAGESH KUMAR HAS A PROBLEM WITH SLOW GROWTH

Nagesh Kumar has been concerned about the way growth has slowed in FY25 with the growth in FY25, likely to be over 15 bps lower than FY24. Also, Trump tariffs could only worsen matters in terms of global demand. Nagesh Kumar also pointed out that much of the worsening in growth came about in the manufacturing sector. Nagesh Kumar added that the Q3FY25 corporate results have also corroborated this view of GDP slowing down. The tariffs, it is feared could accelerate dumping from China, making things a lot tougher for India. Nagesh Kumar voted for a 25 bps rate cut in the light of growth weakness and relatively benign inflation in the last 2 months.

• SAUGATA BHATTACHARYA SEES FOOD INFLATION TAPERING

Saugata Bhattacharya voted for a 25 bps rate cut and status quo on repo rates based on a sharp lowering of food inflation, and green shoots of recovery in real growth. Bhattacharya has specifically used the term “cautiously optimistic” for the current macroeconomic situation. He has also added that any further rate cuts would be fully data driven and based on an assessment of the likely impact of Trump Tariffs. He also added that there had been slowing of credit flow to the small cap sector and lower rates should be helpful. He underlined that it was worthwhile lowering rates, despite the risk of weakening Rupee.

• PROF RAM SINGH FOCUSES ON CORE CPI EX-PRECIOUS METALS

Ram Singh of DSE makes an interesting point that core inflation would be negative if the price impact of gold and silver were removed. Once that is adjusted, the headline inflation too should be much lower. Ram Singh also expressed concerns over slowing growth and underlined the need to act urgently by lowering rates. He also felt that a rate cut at this juncture would be in sync with the consumer spending focus of the Union Budget. Singh felt, that the currency risk was worth taking, as risk of imported inflation was sharply lower.

• RAJIV RANJAN FOCUSES ON LOGICAL PROGRESS OF MONETARY POLICY

Rajiv Ranjan of the RBI felt that rate cuts were a natural progression. In October, the policy stance had been shifted to neutral while in December, the RBI had boosted liquidity with a cut in CRR. Hence, the rate cut by 25 bps in February policy was a logical progression. The rate cut was also in tune with the strongly counter-cyclical approach of the Union Budget presented on February 01, 2025. According to Ranjan, the neutral stance would take care of global risks, while the rate cut would help boost economic growth in the Indian economy.

• RAJESHWAR RAO CONCERNED ABOUT WEAK CAPITAL FORMATION

Rajeshwar Rao, who replaced Michael Patra in the MPC, underlined that more than the slowing GDP growth, it was the weak capital formation that was disconcerting. Government had done its bit by growing capex spending at over 30% in FY23 and FY24. However, the private sector is yet to join the bandwagon, and that could get help from the lowering rates. Rao also voted for a 25 bps rate cut and maintaining the neutral stance.

• RBI GOVERNOR VOTES FOR GROWTH PLUS STABILITY

Participating in h is first MPC meet as RBI governor, Sanjay Malhotra focused on a unique role for RBI, combining growth support with macroeconomic stability. He underlined that the issue of stability had become critical due to the current global uncertainty over macro, trade, and geopolitical risks. RBI governor also underlined the fact that the RBI policy had to support the counter-cyclical thrust of the Union Budget. He was also confident of a pick-up in growth, led by agriculture and services; while an industrial recovery may be a tad longer.

WILL INDIA EMBARK ON A SECOND RATE CUT?

That is the million dollar question, especially as the RBI is just about reacting to 100 bps of rate cut already implemented by the US Fed. For now, markets are optimistic that there could be one more rate cut, although the RBI looks unlikely to go beyond that in 2025. However, more than the rate cuts, the markets would also be interested in a CRR cut, which should take care of the persistent liquidity deficit in the economy.