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The February meeting minutes showed a convergence in the views of members – all expressed a need for easing rates to support growth, with the improving inflation outlook providing room for this. The topic of currency depreciation risks was raised by some members, but while Bhattacharya stated that the impact on inflation is mild, Dr Ranjan was forceful in stating that the need is to preserve higher growth momentum for attracting capital flows and not to focus on rate differentials. Going forward, we expect a shallow rate cut cycle (another 25-50bps), along with likelihood of easing of regulatory measures.

Increasing convergence in views toward rate cut to support growth

The February MPC meeting minutes show the members having convergence in views, as evidenced in the unanimous decision to cut the repo rate by 25bps while maintaining the ‘neutral’ stance. Every member spoke of the need to cut rates to support flagging growth, with inflation now becoming less of a concern.

Members agree that lower inflation outlook provides room for easing

Every MPC member, both internal and external, stated that the lower inflation trajectory in the past few months as well as the comfortable outlook going ahead provide the MPC with elbow room for a rate cut to support growth. The growth-inflation balance has thus turned decisively negative for growth, in the MPC’s opinion. Professor Singh once again stated that food inflation is supply-driven, given the lack of significant effect on food prices through changes in the repo rate. He also opined that persistently low core inflation over the past two years, along with the current slowdown in growth, means that the actual growth rate is much lower than potential growth, and thus there is a need to focus on the growth side of the RBI’s dual mandate. The new Governor Sanjay Malhotra also agreed that the lower inflation outlook means that a lower policy rate is more appropriate. Most members also mentioned the liquidity infusion measures in January as necessary for helping set the path for rate cuts.

FX concerns cited, but need to focus on growth outperformance emphasized

A few members did mention the risk of currency depreciation following a rate cut, in the context of the sharp (relative) fall in currency in January. However, most members were sanguine here. Bhattacharya stated that the estimated impact is quite mild – a 5% Rupee depreciation leads to an uptick of ~35bps in CPI inflation (while growth improves by 25bps due to a short-term boost to exports). Dr Ranjan was more forceful and said that interest rate defense of a currency during periods of outflows, that do not differentiate across countries, could be counterproductive. He also said that India attracts capital flows due to its growth outperformance, and not because of interest rate differentials; and so it is imperative to preserve the high growth momentum in the medium term. We too had highlighted this recently (Refer to Macro Strategy: Three unsettling issues for India in 2025), and it does seem as though the RBI has now loosened its reins to some extent on FX under the new Governor. Professor Singh pointed to the risk of higher outflows due to lower interest rate differentials, but cited recent history to suggest that this is a lowprobability scenario; he also stated that with DMs having recently cut rates also provides room for India to cut rates.

Shallow rate cut cycle expected going ahead

The commencement of the rate cut cycle in February was on expected lines, and the minutes show how there was broad convergence in members’ views across most pressing issues. Going ahead, however, we only expect a shallow rate cut cycle of 25-50bps, with further liquidity easing measures also possible (albeit there have already been several further liquidity infusion announcements). Delay in implementation of the ensuing LCR and project financing/ECL provisioning, at least till end-FY26, should also be viewed as easing by stealth, in our view.

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