Amid high inflation, RBI retains repo rate at 6.5%

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Last Updated09/12/2024

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday (December 6, 2024) held steadfast in its battle against inflation amid weakening growth momentum.

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) maintained the policy repo rate at 6.50% for the eleventh consecutive time during its bi-monthly review on December 6, 2024, signaling its steadfast focus on inflation control amidst weakening growth momentum. However, recognizing tight liquidity conditions, the RBI cut the Cash Reserve Ratio (CRR) by 50 basis points to 4%, marking the first reduction in nearly four years.

Repo Rate Status Quo:
- Four out of six MPC members voted to keep the repo rate unchanged, reflecting a unified focus on price stability while supporting growth. Inflation hit 6.2% in October, breaching the RBI’s upper tolerance band, necessitating caution despite a slowing economy.
CRR Reduction:
- The 50 bps CRR cut will be implemented in two tranches starting December 14 and December 28, 2024, releasing ₹1.16 lakh crore in primary liquidity to ease systemic stress. This step aims to mitigate liquidity pressures arising from tax payments and support growth.

Slowing Growth:
- Real GDP growth for Q2 of 2024-25 fell to a seven-quarter low of 5.4%, well below the RBI’s earlier projection of 7%.
- The RBI downgraded its full-year growth forecast to 6.6% from 7.2%, citing high inflation and reduced private consumption as key drags.
Inflationary Pressures:
- Inflation is now projected at 4.8% for 2024-25, up from the earlier estimate of 4.5%, driven by rising food prices.
- Seasonal correction, a good rabi harvest, and adequate buffer stocks are expected to ease food inflation by Q4 FY25.
- Adverse weather events and geopolitical uncertainties pose additional risks.

FCNR(B) Deposit Interest Ceiling Raised:
- Banks can now offer higher interest rates on foreign currency non-resident (banking) deposits to attract capital inflows.
- The ceiling for 1-3 years maturity has been raised to ARR + 400 bps from 250 bps, and for 3-5 years maturity to ARR + 500 bps from 350 bps.
Neutral Policy Stance:
- The MPC retained its neutral stance, emphasizing durable price stability as essential for strong economic growth foundations.

RBI Governor Shaktikanta Das highlighted the “critical juncture” faced by the Indian economy, with growth moderation juxtaposed against persistent inflation. The MPC adopted a prudent and cautious approach, emphasizing close monitoring of evolving conditions before making further adjustments.
Despite some calls for rate cuts to boost growth, the MPC prioritized maintaining stability, reaffirming its commitment to restoring a balance between inflation and growth.