Reserve Bank of India (RBI) Governor Sanjay Malhotra believes that given the benign inflation outlook – both headline and core – real interest rates need to be lower.
According to the minutes of the Monetary Policy Committee meeting released on Friday, Malhotra voted for a 25 basis point rate (bps) cut because demand pressures are minimal and projected to remain low in the next three quarters . “This will also stimulate demand and be growth-supportive,” he added.
The six-member Monetary Policy Committee cut the repo rate by 25 bps to 5.25% in December, taking the total cut in 2025 to 125 bps. The panel also retained a neutral stance, five members, including the governor, backing it.
Malhotra explained that the headline inflation in the first half at 2.2% turned out to be much softer than anticipated due to the generalised moderation in price pressures, particularly the sharp decline in food prices.
Going ahead, good agricultural production, low food prices and exceptionally benign international commodity price outlook suggest that headline inflation for the full year (2025-26) is likely to be around 2%. The RBI has also revised the FY26 growth projection from 6.8% to 7.3%.
Inflation ‘Breach’
He also said that retaining the neutral stance gives the requisite flexibility to remain data-dependent and act according to the evolving macroeconomic conditions and outlook in the February policy.
Growth Safeguard
Ram Singh, an external member of the RBI’s MPC said a delay in the rate cut would hurt real GDP growth by keeping real interest rates unnecessarily above growth-supportive levels. “The delay will extend the low-inflation phase, which has important implications both micro and macro including a less-than expected nominal GDP growth,” he said.
