The Reserve Bank of India (RBI) is likely to implement further interest rate cuts in the coming months to boost economic growth, indicating a shift in priority from inflation control to economic expansion.
The latest minutes of the Monetary Policy Committee (MPC), released on Friday, suggest that the central bank is prepared to diverge from the inflation-focused policies of major developed economies in favour of supporting growth.
The RBI expects headline inflation to eventually stabilise within legally defined limits, which could provide room for additional rate cuts.
Additionally, the central bank may employ other measures beyond policy rates to stimulate the economy, as indicated in the MPC's minutes. This follows the February 7 policy review meeting, which marked the first interest rate reduction in nearly five years.
"Given the macroeconomic outlook, where inflation is expected to align with the target, and recognising that monetary policy is forward-looking, I view a lower policy rate to be more appropriate at the current juncture," RBI Governor Sanjay Malhotra stated in the minutes. The February 7 meeting was the first chaired by Malhotra since taking office in December.
The renewed emphasis on growth by the rate-setting panel, which had prioritised price stability and maintained rates for nearly two years, suggests that inflation concerns have been sufficiently addressed.
"There is a need to preserve the high growth momentum while maintaining price stability, necessitating monetary policy to use various policy instruments to maintain the inflation-growth balance," Malhotra said.
The MPC also noted that the impact of global trade disruptions on inflation is expected to be minimal.
Moreover, high real interest rates provide scope for reducing borrowing costs further, allowing businesses and consumers to benefit from lower financing expenses.
At the February 7 meeting, the MPC unanimously decided to cut the key repo rate by 25 basis points to 6.25 per cent. This marked the first rate reduction since 2019.
The committee retained a 'neutral' monetary stance, providing flexibility to respond to global economic conditions and currency fluctuations.
External members of the MPC, who had previously dissented in favour of rate cuts, continue to argue that monetary policy remains too restrictive. They believe that the slowdown in loan growth necessitates lower interest rates to revive consumption and investment.
"Considering the seriousness of the growth slowdown and the elbow room provided by moderating inflationary pressures, I strongly feel that the MPC should begin the process of normalising monetary policy with a rate cut," external member Nagesh Kumar stated in the minutes.
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