Reserve Bank of India’s Monetary Policy Committee (MPC) Decision
The Reserve Bank of India’s MPC has decided to cut interest rates by 25 basis points to 5.25%. This decision reflects an assessment of India's current economic state and future expectations.
Interest Rate Cuts
- Cumulative interest rate cuts in 2025 stand at 125 basis points.
- Similar large cuts were last seen in 2019 with a 135 basis points reduction.
Economic Growth
India's GDP growth trajectory shows acceleration from 5.6% in Q2 of last year to 8.2% in Q2 of this year.
- The MPC might not be fully convinced by the robust growth numbers, hence the supportive monetary policy.
- There is a perception that Indian companies have excess capacity, reducing risks of economic overheating.
Real Growth and Investment
- Real growth appears higher due to a low deflator.
- Companies might afford more investments, possibly fueled by debt.
Impact of U.S. Tariffs
- U.S. tariffs may not have fully impacted the economy yet.
- Cheaper credit is beneficial for Indian MSMEs, particularly exporters.
Inflation Outlook
- The MPC has reduced the inflation outlook for the year to 2%.
- A potential rise in food or oil prices could affect inflation calculations.
- The MPC remains prepared to raise rates if inflation rises unexpectedly.
Historical Context and Future Preparedness
- In 2019, inflation surged from 2% to 7.6% in about a year, following rate cuts.
- The MPC retains a neutral stance to quickly adapt to global uncertainties affecting growth and inflation.
