Can RBI’s Rate Cut Revive Growth?

However, challenges remain, including forex volatility, foreign portfolio outflows, and global trade uncertainties. The new RBI leadership's neutral stance keeps the door open for further rate adjustments, ensuring flexibility in navigating economic uncertainties. As India targets a 6.7% GDP growth for 2025-26, monetary and fiscal coordination will be crucial in sustaining economic momentum

Reserve Bank of India under the new Governor Sanjay Malhotra in his maiden Monetary Policy Committee meeting held on February 7, along with other Monetary Policy Committee members decided unanimously to cut the repo rate by 25 basis points thereby ending the waiting period for rep rate cut. The market was expecting this time the rate cut of 25 basis points and the current rate cut after a long wait, meet the expectations of all stakeholders. It was also being voiced that the continuation of repo rate at 6.5 per cent earlier was one of the reasons for real GDP growth of the Indian economy suffering with substantially low growth at 5.4 per cent as against earlier growth of 8.2 per cent last year and thereby expected Real GDP growth being moderated at 6.4 per cent for the current year, even though it may not be only the only reason as there are other reasons like lesser government capex expenditure, manufacturing slow down, lesser urban demand etc, were the contributors for the slowdown in India’s growth.

However in the background of people oriented, inclusive and comprehensive new initiatives taken in the recent Union Budget 2025-26 which has been appreciated for big tax relief given to middle income by tax relief of more than Rs 1 crore and fiscal consolidation policy continuously followed by government and keeping the focus on engines of agriculture sector, MSMES, exports, investments etc, with equal focus on capex on infrastructure, it was expected that RBI will prioritise growth in the dynamics of growth versus inflation as RBI will utilise the space available in the current juncture to effect the repo rate cut as the headline inflation for November and December has shown the declining trend even though the current headline inflation and expected inflation is not yet achieved the desired level of inflation target of 4 per cent. Overall, the reasonable control on inflation has been achieved and the earlier tight monetary policy stance followed by the RBI with repo rate of 6.5 per cent with a status quo, has been giving the desired results.

This rate cut it is hoped that will give the necessary impetus to demand pick up and higher capacity utilisation of manufacturing in the background of more than Rs 1 crore tax relief given for the tax payers which is also expected to spent towards necessities as well few discretionary items. With the target of Rs 11.2 lakh crore capital budget of Union government coupled with capex expenditure by States and central PSUs, if executed and implemented in the year 2025-26 progressively should lead to accelerate the growth coupled with private sector investment which along with the favourable environment provided by the Budget, RBI has further facilitated with the repo rate cut of 25 basis points. This rate cut is after a gap of five years as we found in Covid-19 repo rate was cut to 4 per cent followed by later more than 250 basis points increase to 6.5 per cent in the light of inflation going up which now found favour by RBI to effect rate cut. In this regard, US Federal Reserve has started rate reduction along with few central banks elsewhere and RBI is now joining the central banks who have moderated the reference rates.

RBI has stated in the current monetary policy that along with rate cut, they are continuing with their neutral stance which provides further space for RBI to take up required steps for easing repo rate if inflation follow the current trajectory of declining trend. RBI projection of headline inflation for the current year at 4.8 per cent and for the next year 2025-26 at 4.2 per cent. Economists and market expect that at the current projected inflation, RBI will have more space to cut the repo rate and there may be another 25-basis points rate cut in the next April 2025 RBI Monetary Policy.

In view of the good monsoon and better than expected agricultural production, it is expected that food inflation too is likely to moderate along with other areas of inflation already moderating. This will facilitate for more moderated RBI stance on inflation and that will also facilitate growth pick up. In the current situation of uncertainties globally due to trade restrictions and few unexpected policy changes which will have an impact on emerging economies which already resulted in large foreign portfolio outflow from equity market in view of dollar getting stronger and Emerging currencies are seeing great volatility by large depreciation which needs to be closely watched and both government and RBI have to take required steps to avoid volatility and protect our economy. In this background, RBI current rate cut is morale booster. Indian currency has also depreciated recently at 3.2 per cent since November 6, 2024 even though at moderate level and RBI has to utilise its foreign currency reserves to avoid volatility. This has consumed substantial amount of forex reserves of India and India's forex reserves have come down from earlier peak of 700 billion US dollars to current level of 630.6 billion US dollars.

As far real GDP growth for the year 2025-26 has been estimated by RBI at 6.7 per cent as against Economic Survey projecting a growth rate of 6.3 per cent to 6.8 per cent. This presupposes that manufacturing, mining and electricity are expected to gradually rebound. It is also expected with the expected monsoon normal, with sufficient reservoirs level, agriculture is also expected to give the necessary desired results. According to RBI, government consumption expenditure is expected to remain modest. Higher capacity utilisation levels, robust business expectations, government policies support augur for growth in investment. The expected growth looks on optimistic note looking at the current growth rate and we need to watch the evolving situation.

RBI has already taken great measures to provide liquidity to the extent of Rs 1.50 lakh crore in overall with various liquidity tools in view the recent liquidity tightness observed in the market and has stated that RBI is committed to provide sufficient liquidity as when there is a requirement with appropriate measures.

RBI new Governor and the Monetary Policy Committee members have taken a positive action as they feel less restrictive policy is more appropriate at the current juncture and it should result in the transmission of rate cut to borrowers and facilitating further investments and gradually improving the economy.

(The author is former Chairman & Managing Director of Indian Overseas Bank)