As expected, the Reserve Bank of India (RBI), in its first monetary policy committee (MPC) meeting for 2025, decided to cut the repo rate, the central bank's rate for short-term loans to banks, by 25bps (basis points) to 6.25% from 6.5%. Consequently, the standing deposit facility (SDF) rate is lowered to 6%, and the marginal standing facility (MSF) rate and the bank rate are reduced to 6.5%. The 25bps rate cut comes after the past rate reduction in May 2020. The last revision of rates happened in February 2023, when the repo rate was hiked by 25bps to 6.5%. Since then, RBI has kept the repo rate unchanged before lowering it in February 2025.

Newly appointed governor Sanjay Malhotra, who chaired his first monetary policy committee (MPCC) meeting, announced the decision of the six-member panel. He says, "The MPC decided to continue with the neutral monetary policy stance and remain unambiguously focussed on a durable alignment of inflation with the target while supporting growth."

"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth," he added.

During the meeting, the MPC stated that inflation has declined. Supported by a favourable outlook on food and the continuing transmission of past monetary policy actions, it is expected to moderate further in FY25-26, gradually aligning with the target.

"The MPC also noted that though growth is expected to recover from the low of the second quarter (Q2) of FY24-25, it is much below that of last year. These growth-inflation dynamics open up policy space for the MPC to support growth while remaining focused on aligning inflation with the target. Accordingly, the MPC unanimously voted to reduce the policy repo rate by 25bps to 6.25%," the RBI governor says.

At the same time, Mr Malhotra says excessive volatility in global financial markets and continued uncertainties about global trade policies coupled with adverse weather events pose risks to the growth and inflation outlook. "This calls for the MPC to remain watchful. Accordingly, the MPC unanimously voted to continue with a neutral stance. This will provide MPC with the flexibility to respond to the evolving macroeconomic environment."

According to RBI, as per the first advance estimates (FAE), real gross domestic product (GDP) is estimated to grow at 6.4% in FY24-25, supported by a recovery in private consumption. On the supply side, growth is supported by the services sector, and there is a recovery in the agriculture sector, while tepid industrial growth is a drag.

Headline inflation softened sequentially in November-December 2024 from its recent peak of 6.2% in October, the central bank says. "The moderation in food inflation, as vegetable price inflation came off from its October high, drove the decline in headline inflation. Core inflation remained subdued across goods and services components and the fuel group continued to be in deflation."

Going ahead, RBI says food inflation pressures, absent any supply side shock, should see a significant softening due to good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects. "Core inflation is expected to rise but remain moderate."

"Continued uncertainty in global financial markets coupled with volatility in energy prices and adverse weather events presents upside risks to the inflation trajectory. Taking all these factors into consideration, CPI inflation for FY24-25 is projected at 4.8%, with Q4 at 4.4%. Assuming a normal monsoon next year, CPI inflation for FY25-26 is projected at 4.2% with Q1 at 4.5%, Q2 at 4.0%, Q3 at 3.8% and Q4 at 4.2%," the RBI governor says.

Mr Malhotra, who took charge as RBI governor in December, also spoke about the experience of the flexible inflation targeting (FIT) framework, introduced in 2016 and reviewed in 2021. He says, "I believe that FIT has served the Indian economy well over these years, including the challenging period since the pandemic. The average inflation has been lower since the introduction of FIT. Moreover, CPI inflation has mostly stayed aligned with the target, barring a few occasions of breaching the upper tolerance band since its inception. We will continue to improve the macroeconomic outcomes in the best interest of the economy using the flexibility embedded in the framework while responding to the evolving growth-inflation dynamics. Moreover, we will strive to further refine the building blocks of this framework by making advances in the use of new data, improving nowcasting and forecasting of key macroeconomic variables and developing more robust models."

Here are the five additional measures announced by the RBI governor...
 

1. Digital Security
According to Mr Malhotra, the rapid digitalisation of financial services has brought convenience and efficiency but has also increased exposure to cyber threats and digital risks, which are getting more sophisticated day by day. The surge in digital fraud is a matter of concern, warranting action by all stakeholders.

RBI has been taking various measures to enhance digital security in the banking and payments system. The introduction of an additional factor of authentication (AFA) for domestic digital payments is one such measure. It is proposed to extend AFA to online international digital payments made to offshore merchants, who are enabled for such authentication.

2. Bank.in Domain for Indian Banks
RBI will implement the 'bank.in' exclusive Internet domain for Indian banks. Registration of this domain name will commence from April this year. This will help avoid banking frauds. This will be followed by the ‘fin.in’ domain for the financial sector.

Banks and non-banking finace companies (NBFCs) must continuously improve preventive and detective controls to mitigate cyber risks. They must develop robust incident response and recovery mechanisms, reinforced through periodic testing, for operational resilience.

3. Introduction of Forward Contracts in Government Securities
Over the past few years, RBI says it has expanded the suite of interest rate derivative products available to market participants to manage their interest rate risks. RBI will now include forward contracts in government securities to this suite. This would facilitate long-term investors such as insurance funds to manage their interest rate risk across interest rate cycles. It will also enable efficient pricing of derivatives that use Government securities as
underlying instruments.

4. Access of SEBI-registered non-bank brokers to negotiated dealing system - order matching (NDS-OM) system
To enhance access of retail investors to government securities, RBI will expand the access of NDS-OM, the electronic trading platform for secondary market transactions in government securities, to non-bank brokers registered with SEBI.

5. Review of trading and settlement timings across various market segments
In view of the various developments in financial markets and market infrastructure over the past few years, RBI will set up a working group with representation from various stakeholders to undertake a comprehensive review of trading and settlement timing of markets regulated by RBI. The group will submit its report by 30 April 2025.