Context:

The Reserve Bank of India (RBI) reduced the repo rate by 0.25% (25 basis points) to 6.25% in a recently held MPC meeting. 

More on the News: 

• The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) held its 53rd meeting from February 5 to 7, 2025, chaired by RBI Governor Shri Sanjay Malhotra.
• This repo rate cut move comes barely a week after the Centre cut personal income tax to boost consumption.

Key Highlights of the Meeting:

Rate cut of 25 basis points (bps) to 6.25% to boost growth.

GDP is expected to grow at 6.7% in 2025-26, driven by consumption & investment.

Inflation is projected at 4.2% for 2025-26, barring major shocks.

Global risks (geopolitics, trade policy, financial volatility) remain key concerns.

Neutral stance in monetary policy maintained to allow flexibility in response to changing conditions.

Other Adjustments: 

• Standing Deposit Facility (SDF) rate: 6.00%
• Marginal Standing Facility (MSF): 6.50%
• Bank Rate: 6.50%

India’s Economic Growth (2024-25): 

• GDP Growth Estimate: 6.4% YoY, driven by private consumption recovery; 
• (Quarterly estimates: Q1 - 6.7%, Q2 - 7.0%, Q3 & Q4 - 6.5% each)

Headline Inflation: Declined from 6.2% in Oct 2024 to lower levels in Nov-Dec 2024 due to falling food inflation.

Projections for 2024-25: CPI Inflation: 4.8% (Q4: 4.4%); Projections for 2025-26: CPI Inflation: 4.2%.

About MPC: 

It is a six-member committee in the Reserve Bank of India (RBI) responsible for deciding the country’s monetary policy, especially the repo rate to contain the inflation within the target level specified to it by the Central Government.

Key Committees which recommended the Constitution of MPC: -

• Y. V. Reddy Committee (2002)
• Raghuram Rajan Committee (2009)
• Urjit Patel Committee (2017)

MPC was set up consequent to the agreement reached between the Government and RBI to task RBI with the responsibility for price stability and inflation targeting. The two parties signed the Monetary Policy Framework Agreement in February 2015.

MPC is defined in Section 2(iii)(cci) of the Reserve Bank of India Act, 1934 and is constituted under Sub-section (1) of Section 45ZB of the same Act. These provisions were inserted by the Finance Act, 2016.

The MPC aims to keep the Consumer Price Index (CPI) inflation at 4%, with a low tolerance limit of 2% and an upper tolerance limit of 6%.

Composition:

• 6 members in total.
• 3 members are from the RBI, consisting of the RBI Governor, the RBI Deputy Governor in charge of monetary policy, and one official nominated by the RBI Board.
• 3 members are external, nominated by the central government. They hold office for 4 years or as specified by the government.

The Governor of RBI is the Chairman of the MPC.

Meeting Frequency: As per the amended Act, RBI has to organise at least four meetings of the MPC in a year (More meetings can be held if the RBI Governor is of that opinion).

At least 4 members must be present for the meeting to be valid.

Voting: Each member gets one vote. If there is a tie, the Governor has a second (casting) vote.

Monetary Policy Report: The RBI releases a report every 6 months, explaining the reasons behind inflation and giving inflation forecasts for the next 6-8 months.