RBI MPC Review - February 2025: First Rate Cut in Nearly Five Years
The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) ?reduced the repo rate by 25 basis points (bps) to 6.25%. This marks the first rate cut since May 2020 and was a unanimous decision under the new Governor and MPC member. The policy stance remains 'neutral,' signaling a balanced approach towards growth and inflation.
- Rate Cut:?A 25 bps reduction in the policy repo rate to 6.25%, with the Standing Deposit Facility (SDF) at 6% and the Marginal Standing Facility (MSF) at 6.5%.
- Inflation Outlook:?Headline inflation is projected to decline from 4.8% in FY25 to 4.2% in FY26, driven by easing food prices and favorable agricultural prospects.
- Growth Forecast:?GDP growth for FY26 is pegged at 6.7%, up from 6.4% in FY25, supported by improved household consumption, stable investment demand, and strong government capex.
- Liquidity Measures:?The RBI addressed the recent banking system liquidity deficit (~Rs 2 lakh crore in January) through open market operations (OMOs), forex swaps, and longer-term variable rate repos.
- Regulatory Changes:?Introduction of forward contracts in government securities, direct NDS-OM access for non-bank brokers, enhanced security for online transactions, and new domain extensions for financial entities.
Implications for Investors:
- Fixed Income:?Bond yields are expected to soften, creating a favorable environment for debt investors. Duration strategies could benefit from further rate cuts if growth moderates and inflation remains under control.
- Equities:?A less restrictive monetary policy bodes well for rate-sensitive sectors like banking, real estate, and automobiles, potentially boosting corporate earnings.
- Currency & Global Outlook:?Vigilance is needed due to risks from global policy shifts, exchange rate volatility, and geopolitical tensions. Investors should diversify to mitigate these risks.
The rate cut signals the beginning of a potential easing cycle, contingent on growth and inflation dynamics.
