RBI MPC meeting 2025: Fiscal monetary harmony for economic growth

After the pro-consumption pivot the government made in its Budget, the Reserve Bank of India (RBI), too, has come to the party. Indeed, after two years of keeping rates on hold at 6.5 per cent, the Monetary Policy Committee in the first meeting under Governor Sanjay Malhotra did not disappoint and delivered a monetary stimulus in the form of a 25 basis point rate cut, supplementing the liquidity injections it had undertaken two weeks ago. The decision to cut rates and to keep the stance neutral was unanimous as well.

 

After a period of tackling contradicting objectives, the RBI has finally found a window of opportunity, where the weakness in economic data around growth and inflation provides a base for policy easing, while seeing some needed adjustment on exchange rate. The softer implementation of universal tariffs by the US administration also provided some tactical space for the RBI to prioritise domestic growth, both by injection of durable liquidity, and space to cut policy rates, in our view.

 

On the growth front, the need for monetary support remains high. After the 5.4 per cent growth shocker in Q2FY25, high frequency indicators for the first half of this financial year are still showing mixed trends. Indeed, rural indicators, such as agriculture production, sowing activity, and tractor sales, are showing resilience, while urban indicators are reflecting pockets of stagnation, in particular consumption and credit growth remains weak across sectors.

 

Further, the festive momentum gathered in October and November has lost some grip, with signs of a demand slowdown leading to overall weakness in consumption and aggregate demand. The fiscal support from Budget 2025-26 in the form of tax cuts could spur consumption but the multiplier effect may not be as strong. The limits to fiscal spending may constrain the government from taking further measures to stimulate consumption. These mixed signals have made the RBI keep FY26 growth only a tad higher at 6.7 per cent, in line with the Ministry of Finance compared to the First Advance estimates for FY25 at 6.4 per cent.

 

On inflation, the temporary spike in perishable food prices is quickly reversing, and food inflation, which had been elevated for some time, looks much more in control. For January and February, our tracking estimates show a steep deceleration in price pressures, leading to a CPI projection for January at 4.4 per cent. Further, with core inflation staying below 4 per cent for over a year, the underlying demand side price pressures remain weak, and may not exert considerable inflationary pressures in the near term. The medium-term trajectory of headline inflation as well for 2025 is looking relatively benign and could even post sub-4 per cent prints in the latter half of the year, with the FY26 inflation print expected to average 4.2 per cent according to RBI forecasts, despite a weaker rupee.

 

Overall, a clear shift is now visible, with the RBI prioritising growth given its various policy constraints. This has been achieved by letting the rupee become more market determined, and the tightness in liquidity conditions have been met with injection of liquidity through various tools. The global policy backdrop, commodity prices, and outlook for capital flows do not provide significant space to maneuver, but still with inflation declining and the rupee adjusting to more realistic levels, the macro imbalances are reducing, even if financial markets remain fragile in sentiment. Once market sentiment stabilises and external sector compulsions get taken care of, the RBI can keep domestic growth as the primary focus especially as supply shocks fade. In the April MPC, subject to global factors, the base case should be for another 25 bps rate cut, bringing the repo rate to 6 per cent.

The author is head of India and Asean Economic Research, BofA Securities