On Friday, the RBI’s monetary policy committee cut interest rates by 25 basis points, joining the list of central banks across the world who have moved to ease rates. The benchmark repo rate stands at 6.25 per cent. The decision of the committee — this was the first time the MPC had met under the new RBI governor, Sanjay Malhotra — was unanimous. Alongside, the committee voted to continue with the neutral policy stance. The MPC’s decision to adopt a less restrictive policy clearly indicates that growth considerations now outweigh concerns over inflation.
The MPC’s decision to lower rates comes after the government cut personal income taxes in the Union budget, a measure that is expected to boost household consumption, providing a fillip to the broader economy. The question, now, is: To what extent can the central bank ease policy rates further to support growth? Its inflation projections — 4 per cent in the second quarter, 3.8 per cent in the third quarter and 4.2 per cent in the fourth quarter — suggest the space for further easing. But the global and domestic environment is challenging. In an uncertain environment, the pressure on the currency is also unlikely to ease. Much will depend on the playing out of the growth-inflation dynamic.
