In his inaugural monetary policy announcement on Friday, Reserve Bank of India (RBI) Governor Sanjay Malhotra revealed that the Monetary Policy Committee (MPC) had unanimously decided to reduce the repo rate by 25 basis points (bps), bringing it down from 6.5% to 6.25%.
Governor Malhotra addressed the challenges posed by the global economic environment, noting that despite high-frequency indicators showing resilience and trade expansion, global growth remains below historical averages. “Progress on global disinflation is stalling, mainly due to services price inflation,” Malhotra stated.
Highlighting the dynamics of global financial markets, he pointed out that expectations surrounding the size and pace of interest rate cuts in the United States had resulted in the strengthening of the US dollar. Malhotra further explained, “The global economic backdrop remains challenging. While there are signs of resilience, the global economy is growing at a rate below historical averages, with global disinflation progress stalling due to inflation in services.”
This global economic uncertainty has led to higher bond yields and substantial capital outflows from emerging markets, triggering sharp currency depreciations and tighter financial conditions. He added, “The strengthening of the US dollar, expectations regarding rate cuts in the US, and hardened bond yields have caused significant capital outflows from emerging markets, leading to sharp currency depreciation and tighter financial conditions. Geopolitical tensions, divergent monetary policies across advanced economies, and elevated trade uncertainties have all contributed to increased market volatility.”
Governor Malhotra also emphasized the impact of these global factors on emerging markets, which face tough policy decisions amid financial uncertainty. Despite these challenges, he expressed confidence in India’s economic resilience, though acknowledging the pressure on the Indian rupee. “The Indian rupee has faced depreciation pressures in recent months,” he said, but reassured that the RBI is actively using all available tools to address the country’s economic challenges.
The MPC, which began its three-day meeting on February 5, 2025, was tasked with reviewing the economic situation and setting the new interest rates. In the previous MPC meeting in December 2024, the RBI had announced a 50-basis-point cut in the cash reserve ratio (CRR), reducing it to 4%, while keeping the repo rate unchanged at 6.5%.
