A reduction in the repo rate by 25 basis points will bolster private consumption and support a revival in private corporate investment activity, Reserve Bank of India Governor Sanjay Malhotra noted in latest monetary policy meeting. According to the minutes of the meeting, he opined that going forward considering the evolving growth-inflation trajectories, monetary policy needs to be accommodative.
Malhotra stated that the global economic landscape remains in a state of flux amidst heightened trade and policy uncertainties, with attendant implications for economies across the world, posing complex challenges and trade-offs in policy making. The channels through which these global shocks could impact economies, particularly emerging market economies, include spillovers from global growth slowdown, elevated financial markets volatility and dented consumer and investor confidence.
The Indian economy remains relatively less exposed and better placed to withstand such spillovers with its growth driven largely by domestic demand. Nevertheless, we are not immune to the aftershocks and ripple effects associated with global disturbances. There may also be some positive spin-off to the Indian economy from the likely softening of crude oil and commodity prices and relative tariff advantage.
The high frequency indicators for the latest period indicate that domestic demand continues to be resilient, with urban consumption improving with an uptick in discretionary spending and rural consumption remaining robust on the back of favourable agricultural prospects. Investment activity shall get a boost from a pick-up in government capex and a congenial environment for private corporate investment. Headline inflation reading at 3.6 per cent in February 2025 (averaging at 4.0 per cent during January-February 2025) aided further disinflation with food inflation turning out to be very benign.
There is now greater clarity on the food inflation outlook as the uncertainties related to rabi crops production have abated. When consumer price inflation is decisively around its target rate of 4.0 per cent and growth is still moderate and recovering, monetary policy needs to nurture domestic demand impulses to further increase the growth momentum. This is specially so amidst an uncertain global environment, which has amplified downside risks to growth.