RBI Monetary Policy Decision: Newly Appointed Governor Sanjay Malhotra to Present MPC Decision

On February 5, 2025, the Reserve Bank of India’s (RBI) monetary policy committee meeting began and is expected to conclude its longest pause in interest rates with a rate cut on Friday February 7, 2025, as per various news reports.

The meeting includes two new RBI members: Governor Sanjay Malhotra and Deputy Governor M. Rajeshwar Rao. This is their first meeting, replacing their predecessors Shaktikanta Das and Michael Patra. Malhotra recently announced liquidity measures, injecting ₹1.5 lakh crore into the economy, which is seen as paving the way for rate transmission. However, a liquidity deficit could still keep borrowing costs high despite a potential rate cut.

The last rate cut occurred in May 2020 when the repo rate was reduced to 4% to help support the economy during the Covid-induced lockdown. Since then, the RBI raised rates seven times to 6.5% due to inflationary pressures, exacerbated by the Ukraine war, supply chain disruptions, and global price surges. The rate pause has remained in effect since February 2023.

Expectations for Rate Cut

Most economists predict a 25 basis points (bps) rate cut, although some argue it may be premature, especially if US President Donald Trump escalates tariff threats, which could worsen financial market volatility. Lower rates could also weaken the rupee, potentially making US debt more attractive to foreign investors.

Government’s Support for Rate Cut

The government has supported a rate cut, with the Union budget emphasizing consumption revival to boost economic growth. In her Budget speech on February 1, Finance Minister Nirmala Sitharaman stated that the government had slowed down the pace of fiscal consolidation in FY26, targeting a fiscal deficit reduction to 4.4% of GDP (from 4.8% in FY25 RE). Additionally, income tax relief for middle-class households was announced, which could provide a much-needed boost to consumption.

Market Reactions Ahead of the Decision

Ahead of the RBI’s monetary policy decision, the benchmark indices saw a decline, with the BSE Sensex falling by 0.37% to 77,981.64, and the Nifty 50 dropping 0.37% to 23,608.50 at 11:35 AM on February 6, 2025.

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