RBI MPC Minutes: Considering benign inflation outlook real interest rates need to be lower, says Governor Sanjay Malhotra

“…demand pressures, as evident from low core inflation (excluding precious metals), are minimal and projected to remain low in the next three quarters. Considering the benign inflation outlook — headline as well as core — real interest rates need to be lower,” Malhotra wrote in the minutes of the MPC meeting, held from December 3 to 5.

The country’s CPI inflation, or retail inflation, rose to 0.71 per cent in November from a record low of 0.25 per cent in October.

Malhotra added that although domestic economic activity remains resilient in Q3, weakness in some leading high-frequency indicators is suggestive of a deceleration in the growth momentum in the second half (H2) of FY25 compared with the first half (H1). The country’s GDP expanded by a better than expected 8.2 per cent in Q2.

Overall, real GDP growth is poised to exceed 7 per cent, much above the RBI’s expectation of 6.5 per cent at the beginning of the year, as healthy domestic prospects outweigh the concerns on the external front, he said. “Going forward in H1 next year, domestic growth is projected to remain strong, though moderate to 6.7-6.8 per cent,” Malhotra said. He favoured retaining the neutral stance as it gives the requisite flexibility to remain data-dependent and act according to the evolving macroeconomic conditions and outlook.

RBI Deputy Governor Poonam Gupta said that the faster than anticipated moderation in CPI headline inflation has been the most crucial recent development from the perspective of monetary policy.

“Even if the MPC members traditionally consider a whole host of factors in their decisions, but when the prevailing inflation and its forecast is as low as it is currently – it alone ought to get a larger weight in the monetary policy deliberations,” Gupta, who voted for a 25 bps cut, wrote in the minutes.

One of the external MPC members, Saugata Bhattacharya, said the cumulative policy rate cuts and liquidity infusions will now have moved the orientation of monetary policy from mildly restrictive to balanced.

“Pending incoming data, I believe the policy interest rate is now consistent with macroeconomic stability,” he wrote in the minutes.

MPC member and RBI Executive Director Indranil Bhattacharyya, who voted for a 25 bps reduction in the repo rate and a neutral stance, said, “when muted inflation outlook, both in terms of the trajectory of headline and core (excluding precious metals), suggests absence of demand pressures, the MPC ought to support growth, particularly when it is projected to decelerate going ahead.”

The neutral stance preserves the flexibility to respond judiciously to the evolving situation by remaining data dependent while avoiding the pitfalls of precommitment in an uncertain environment, he wrote in the minutes.

MPC member Ram Singh said given the uncertainty on the external front, it seems prudent to go for only a 25-bps cut at this point.

“In view of the dormancy in the price momentum underlying headline CPI and CPI core, and the case for supporting growth momentum, the rate cut should be accompanied by a change in stance to ‘accommodative’,” Singh said.mpc