RBI Faces Balancing Act: Growth vs Inflation in February MPC

The Reserve Bank of India is expected to consider shallow rate cuts in its February 2025 MPC meeting amid global economic caution and domestic inflation moderation. With the US Federal Reserve adopting a hawkish stance, the RBI aims to manage growth concerns while ensuring inflation remains under control.

In its upcoming February 2025 Monetary Policy Committee meeting, the Reserve Bank of India (RBI) is anticipated to consider shallow rate cuts, a strategic move influenced by cautious global economic conditions. A report from Sharekhan, a prominent capital markets company, highlights that the recent 25 basis points rate cut by the US Federal Reserve was paired with an unexpectedly hawkish tone, underscoring inflation worries and a robust US economy.

This approach by the Fed has bolstered the US Dollar Index, exerting additional pressure on the Indian rupee and elevating the risk of imported inflation. Given these dynamics, the RBI is expected to mirror a cautious path, opting for minor rate reductions rather than aggressive cuts to address growth and inflationary concerns simultaneously.

On the domestic front, retail inflation, as reflected by the Consumer Price Index (CPI), eased to 5.5% in November 2024 from 6.2% the previous month, primarily due to a decline in food inflation. The RBI's updated monetary policy outlook anticipates further easing of food inflation beginning in the fourth quarter of FY25, prompting upward revisions in CPI inflation projections for FY25 from 4.5% to 4.8%.

The recent downward trend in CPI inflation, coupled with the outlook for continued easing, offers the central bank potential leeway to implement rate cuts aimed at supporting the slowing economy. The Sharekhan report postulates that while growth apprehensions will weigh on the MPC's deliberations, the committee's focus will remain fixed on keeping inflation within manageable limits. The February policy meeting is poised to be a critical event as the RBI strives to harmonize growth facilitation with price stability.

(With inputs from agencies.)