A tough call: on the RBI MPC’s first policy review of 2025 Politics & News

The Reserve Bank of India’s Monetary Policy Committee (MPC) will conclude its first policy review of 2025 on Friday, in significantly different circumstances from its December meet. For one, the key personnel have changed. The RBI has a new Governor, with former Revenue Secretary Sanjay Malhotra replacing Shaktikanta Das soon after the last review. Deputy Governor Michael Patra, an MPC member who was in charge of monetary policy, also retired last month. With the Centre yet to name his successor, navigating this review is going to be a tad tricky for the new central bank boss, with another deputy holding additional charge of monetary policy. Second, the rupee is in a free fall of sorts. After hitting 85 to the U.S. dollar on December 19, 2024, it slipped to 86 on January 13, 2025 and crossed 87 on February 3, partly due to the third factor at work. The strengthening dollar is driven by U.S. President Donald Trump’s overdrive to ‘Make America Great Again’ with higher tariffs on major trade partners, and other disruptive economic plans such as exiting global tax accords, shutting aid flows, et al.

One thing has not changed — the clamour for an interest rate cut from industry and government honchos. In December, this noise was heightened after a sharp growth blip in the July-September quarter when GDP grew just 5.4%. Now, with 2024-25 GDP growth downgraded to just 6.4%, and the no marked uptick in economic metrics in the December-ending quarter, growth worries remain entrenched. In the interim, there has been some back and forth between North Block and Mint Street on the factors responsible for stumbling economic activity. The Finance Ministry sought to lay some of the blame for an urban demand slump on tight monetary policy. RBI officials, in the central bank’s January bulletin, said the “one way” to spark a growth rebound and a virtuous cycle of fresh private investments, is to boost consumption through higher disposable incomes, especially for the urban middle class that has been pining for relief from food inflation. With the Budget delivering on this front with income tax cuts, the ball is back in the RBI’s court. Inflation has been over 5% in the last five months, but may have eased closer to the RBI’s 4% target in January. But a rate cut could also hurt the rupee further, and spur higher imported inflation. It is an unenviable situation for the new RBI chief to be in; he might be tempted to take a cue from Mr. Das who had surprised markets with a rate cut in the first review under his watch in 2019, reversing his predecessor’s stance.