The Reserve Bank of India’s monetary policy committee meeting on December 6, 2024, delivered a blend of caution and pragmatism as it sought to address the complex challenges of slowing growth and persistent inflation. The RBI committee decided to maintain the policy repo rate at 6.5% for the eleventh consecutive time, and to reduce the cash reserve ratio by 50 basis points to 4%. These measures, coupled with revised economic forecasts, signal a carefully calibrated approach to sustaining economic stability while navigating uncertain macroeconomic conditions.
The cut in the CRR is a bold step aimed at easing liquidity constraints in the banking system. This measure will infuse approximately Rs 1.16 lakh crore into the economy, providing much-needed liquidity as banks grapple with seasonal demands, tax outflows, and the impact of the RBI’s interventions to stabilise the rupee. By freeing up these reserves, banks are better positioned to expand lending, which could boost sectors like infrastructure and housing.
RBI keeps repo rate unchanged
This move is particularly relevant in a scenario where liquidity pressures have been intensifying due to external factors and year-end credit demand. While the immediate benefits for banks include increased flexibility in managing their resources, the measure also sets the stage for enhanced credit flow, which could have a broader positive impact on economic activity.
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MPC conservative on interest rate
The decision to keep the repo rate unchanged reflects the RBI’s cautious stance in the face of persistent inflationary pressures. Over the past year, inflation has consistently exceeded the central bank’s tolerance threshold, with retail inflation peaking at 6.2% in October 2024, driven largely by surging food prices. At the same time, economic growth has slowed, as evidenced by a significant decline in the GDP growth rate to 5.4% in the second quarter of FY2024-25, the lowest in seven quarters.
The MPC’s decision, by a 4-2 split, highlights the nuanced and often contentious task of balancing inflation control with the need to support growth. The dissenting votes in favour of a rate cut highlight a growing recognition of the challenges posed by slowing growth, even as inflation remains a critical concern.
RBI lowers growth forecast
Revised economic forecasts presented during the meeting paint a cautious outlook for the months ahead. The GDP growth projection for FY2024-25 was lowered to 6.6% from the earlier estimate of 7.2%, reflecting the adverse impact of global and domestic headwinds on industrial activity and consumer demand. Despite these revisions, the RBI expressed optimism about a gradual recovery in the latter half of the fiscal year, driven by festive demand and rural consumption.
Inflation forecasts, on the other hand, were revised upward to 4.8% for FY2024-25, signalling the enduring pressures from food prices and global commodity markets. While seasonal factors and a strong rabi harvest could provide some relief, the risks posed by erratic weather patterns and geopolitical uncertainties remain significant.
A mixed bag for markets
For borrowers and financial markets, the MPC’s decisions hold mixed implications. The unchanged repo rate offers relief to borrowers with loans linked to external benchmark lending rates, as their equated monthly instalments (EMIs) remain stable. However, the CRR cut could lead to marginal reductions in deposit rates, potentially impacting savers.
The move to enhance liquidity also brings the possibility of reduced market interest rates, which could benefit sectors heavily reliant on credit, such as real estate. For the broader financial markets, the CRR cut is likely to improve sentiment and ease bond yields, offering some respite amidst global economic uncertainties.
Beyond these headline measures, the RBI announced several initiatives aimed at deepening financial inclusion and enhancing the resilience of the financial system. These include raising the limit for collateral-free agricultural loans from Rs 1.6 lakh to Rs 2 lakh per borrower, a move that is expected to improve credit access for small and marginal farmers.
The central bank also introduced the secured overnight rupee rate (SORR), a new benchmark aimed at strengthening the country’s interest rate derivatives market, and announced plans to integrate its FX-Retail platform with NPCI’s Bharat Connect platform to broaden accessibility. Additionally, the RBI’s focus on leveraging artificial intelligence and machine learning to combat financial fraud reflects its commitment to safeguarding the integrity of the banking system.
The RBI’s cautious approach suggests that the February 2025 MPC meeting will be closely watched for potential shifts in policy. While the CRR cut provides immediate liquidity relief, a rate cut remains contingent on significant moderation in inflationary pressures.
The central bank’s emphasis on balancing inflation control with growth support reflects the complexity of the current economic environment, where domestic challenges are compounded by global uncertainties. As India navigates these headwinds, the RBI’s calibrated measures will play a pivotal role in ensuring economic stability and fostering sustainable growth.