Reserve Bank Governor Sanjay Malhotra announced a rate cut as an appropriate monetary policy response, citing inflation trends moving towards the central bank's 4% target, as revealed in the minutes from the Monetary Policy Committee (MPC) meeting released today.

The MPC, led by Malhotra, voted to reduce the repo rate by 25 basis points to 6.25%, marking the first rate cut in five years.

This decision comes as headline inflation, which had previously exceeded the upper tolerance band, fell to a five-month low of 4.3% in January 2025.

External MPC members, including Nagesh Kumar, Saugata Bhattacharya, and Ram Singh, supported the rate cut, pointing to downward inflation trends as a significant factor.

Kumar raised concerns about potential dumping of excess capacities from China that could impact Indian manufacturing, while Bhattacharya underscored the necessity of a rate cut in light of the current economic cycle.

Singh emphasized that while the Union Budget 2025 aimed to stimulate demand, immediate interest rate reductions were crucial to encourage private capital expenditure.

During his first MPC meeting, Malhotra also highlighted global financial market uncertainties and the risk of adverse weather events as potential threats to inflation and economic growth.

RBI Executive Director Rajiv Ranjan expressed confidence in the disinflation trajectory and stressed the importance of improving liquidity transmission to support the recent rate cut.

MPC member M Rajeshwar Rao noted that with inflation aligning closer to the target, there was increased flexibility to address growth concerns through the rate reduction.

Despite the rate cut, the RBI maintained a neutral stance on monetary policy, allowing for adaptability to the changing economic landscape.

Looking ahead, the next MPC meeting is scheduled for early April 2025.