Amid high inflation, RBI keeps repo rate unchanged at 6.5%

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, with four of its six members voting to keep the policy repo rate unchanged at 6.50% for the eleventh bi-monthly review in a row.

However, acknowledging that the economy is facing tight liquidity conditions that are likely to persist for a few months, the panel cut the Cash Reserve Ratio (CRR) for banks by 50 basis points to 4%, after a gap of nearly four years, in a bid to support growth.

While divisions within the MPC on a status quo on rates expanded from the 5:1 vote in October, the panel was unanimous on sticking to a ‘neutral’ stance and remaining unambiguously focused on a durable alignment of inflation with its 4% target, while supporting growth. Inflation had spiked to a 14-month high of 6.2% in October, the last available price rise number.

 

“The MPC took note of the recent slowdown in the growth momentum, which translates into a downward revision in the growth forecast for the current year. Going forward into the second half of this year and the next year, the MPC assessed the growth outlook to be resilient, but warranting close monitoring,” RBI Governor Shaktikanta Das said in his monetary policy statement.

While noting the RBI’s mandate is to ensure price stability while supporting growth, Mr. Das said persistently high inflation reduced the disposable income of consumers and dented private consumption which negatively impacted the real GDP growth.

Real GDP growth in the July to September quarter fell to a seven-quarter low of 5.4%, compared to RBI’s 7% projection, and the MPC has now downgraded the growth forecast for 2024-25 to 6.6% from 7.2%.

Similarly, with inflation increasing sharply in September and October led by an unanticipated increase in food prices, the retail inflation for 2024-25 has now been projected at 4.8% compared to the 4.5% average projected till October.

“Food inflation pressures are likely to linger in the third quarter (Q3) of this financial year, and start easing only from Q4 of 2024-25, backed by seasonal correction in vegetable prices, kharif harvest arrivals, likely good rabi output and adequate cereal buffer stocks,” Mr. Das said.

Adverse weather events

The Governor also said the increasing incidence of adverse weather events, heightened geo-political uncertainties and financial market volatility posed upside risks to inflation. “The MPC believes that only with durable price stability can strong foundations be secured for high growth. The MPC remains committed to restoring the inflation growth balance in the overall interest of the economy,” he said.

Terming the current growth-inflation flux a “critical juncture”, the Governor said “prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation with all its complexities and ramifications.” A status quo in monetary policy had thus become appropriate and essential, he reasoned, deftly sidestepping calls for interest rate cuts to support growth from some quarters of the government.

To ease the potential liquidity stress in the system as more cash could be required to pay direct taxes and GST, the RBI has decided to reduce the cash reserve ratio (CRR) of all banks to 4% of net demand and time liabilities (NDTL) in two equal tranches of 25 bps each with effect from the fortnight beginning December 14, 2024 and December 28, 2024.

“This will restore the CRR to 4% of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022. This reduction in the CRR is consistent with the neutral policy stance and would release primary liquidity of about ₹1.16 lakh crore to the banking system,” he said.

Interest rate ceilings up

To attract more capital inflows, the RBI has decided to increase the interest rate ceilings on FCNR(B) deposits. Accordingly, effective from Friday, banks are permitted to raise fresh FCNR(B) deposits of 1 year to less than 3 years maturity at rates not exceeding the ceiling of overnight Alternative Reference Rate (ARR) plus 400 bps as against 250 bps at present.

Similarly, for deposits of 3 to 5 years maturity, the ceiling has been increased to overnight ARR plus 500 bps as against 350 bps at present. This relaxation will be available till March 31, 2025.

In his closing remarks, the Governor said since the last policy, inflation had been on the upside, while there had been a moderation in growth. “Accordingly, the MPC has adopted a prudent and cautious approach in this meeting to wait for better visibility on the growth and inflation outlook.”

“At such a critical juncture, prudence, practicality and timing of decisions become even more critical,” he added.