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The Reserve Bank of India's (RBI) decision to cut interest rates in February 2025 has sparked debate, particularly concerning the timing and the perceived influence of the new governor, Sanjay Malhotra. The contrasting approaches of Malhotra and his predecessor, Shaktikanta Das, highlight the impact of individual leadership on policy decisions, even within a framework of established rules and mandates. While Das prioritized the inflation target, emphasizing a durable 4% rate, Malhotra emphasized the 'flexibility' within the framework, leading to the rate cut despite significant uncertainties.
The macroeconomic environment preceding the February meeting differed substantially from December 2024. Domestically, the National Statistical Office's lower-than-expected growth estimate (6.4% vs RBI's 6.6%) and the Union budget's optimistic growth projections, coupled with substantial tax giveaways, presented a complex picture. Internationally, heightened geopolitical uncertainty stemming from US President Trump's actions added further complexity. The potential for trade wars and disrupted supply chains cast a long shadow over the reliability of both the budget projections and the RBI's own growth and inflation forecasts. This uncertainty fundamentally altered the balance of risks, although the precise direction of this shift remained unclear.
The US Federal Reserve's decision to adopt a 'wait-and-see' approach, as articulated by Mary Daley of the Federal Reserve Bank of San Francisco, offered a stark contrast to the RBI's actions. The US central bank acknowledged the need to carefully assess the impact of Trump's policies before taking preemptive action. However, the RBI's MPC seemed to disregard this cautious approach. The weakening rupee, a consequence of dollar strength, posed a significant threat. While typically beneficial for exports, this was counteracted by rising protectionist barriers and India's existing 'tariff king' status. Consequently, the weaker rupee threatened to inflate import prices, particularly oil, leading to imported inflation and potentially accelerating capital outflows, putting further pressure on the currency.
The MPC's projection of lower inflation for 2025-26 (4.2% compared to 4.8% in the current fiscal year) clashes with the heightened risk of imported inflation. Governor Malhotra's assurances that this risk had been factored into the projection lacked detail and failed to alleviate concerns. Similarly, the rationale for a rate cut given the relatively healthy economic growth (6.4% in 2024-25 and projected 6.7% in 2025-26) is questionable, particularly considering the earlier implementation of liquidity-easing measures, including a CRR cut. The growth in 2024-25 was lower than the previous year (8.2%), but this was largely due to a low base effect, making direct comparison misleading. The unanimous vote for a 25 basis point rate reduction to 6.25% appears hasty given the considerable uncertainty.
The RBI's actions suggest a prioritization of growth over inflation control. The additional measures to ease liquidity, including the extended timeframe for implementing tighter liquidity coverage ratio norms, could have provided ample opportunity for a more measured response. The prevailing uncertainty surrounding the global economic landscape strongly argued for a 'wait-and-see' approach. This would have allowed the RBI to better assess the shifting balance of risks and to manage liquidity in the interim. In conclusion, the RBI's decision to cut interest rates appears premature, potentially overlooking the significant risks presented by the current global economic climate. The lack of transparency and the apparent disregard for the uncertainties surrounding both domestic and global economic factors raise questions about the prudence of the MPC's actions.
The author's expertise as a senior journalist and former central banker lends credibility to the analysis. However, it is important to note that alternative perspectives and opinions exist concerning the RBI's monetary policy decisions. The complexity of economic forecasting and the interplay of diverse economic factors necessitate a thorough and balanced understanding of the situation before reaching definitive conclusions. Further research and analysis are needed to fully assess the long-term implications of the RBI's February 2025 rate cut and to determine whether the decision ultimately proved to be beneficial or detrimental to the Indian economy.
Source: Monetary policy: Surely, a rate cut could’ve waited for some clarity to emerge