RBI Monetary Policy Update: December 2024

The Reserve Bank of India (RBI) announced its much-awaited monetary policy review today, highlighting key concerns over sticky inflation and a deceleration in economic growth. Chaired by Governor Shaktikanta Das, the Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 6.5%, marking the 11th consecutive meeting of maintaining a status quo. Here's an in-depth look at the key outcomes:

1. Repo Rate and Policy Stance

The RBI maintained the benchmark repo rate at 6.5% and upheld a ‘neutral’ policy stance. This decision was taken amidst concerns of diminished growth momentum and persistent food inflation pressures. The SDF rate remained at 6.25%, while the MSF and Bank Rate were fixed at 6.75%.

2. CRR Reduction by 50 Basis Points

A major liquidity-boosting measure announced was the reduction in the Cash Reserve Ratio (CRR) by 50 basis points, lowering it to 4% of Net Demand and Time Liabilities (NDTL).

• The CRR cut will take effect in two tranches of 25 bps each, starting December 14 and December 28, 2024.
• This move is expected to release primary liquidity worth ₹1.16 lakh crore, restoring CRR to pre-April 2022 levels.

3. FY25 Growth Projections Revised Downward

The RBI revised the FY25 GDP growth forecast to 6.6%, down from an earlier estimate of 7.2%.

• The downward revision comes on the back of weaker-than-expected Q2 GDP growth, which stood at 5.4%.
• Quarterly projections were also lowered:
  • Q3FY25: From 7.4% to 6.8%
  • Q4FY25: From 7.4% to 7.2%
  • Q1FY26: From 7.3% to 6.9%

The RBI noted that high-frequency indicators suggested that domestic activity had bottomed out in Q2FY25, but festive demand and improved rural economic activity have since bolstered recovery.

4. Inflation Estimates Revised Upward

Inflation remains a critical challenge for policymakers. The RBI raised its FY25 inflation forecast to 4.8%, compared to the earlier estimate of 4.5%.

• Q3FY25 inflation is now expected at 5.7%, significantly higher than the earlier 4.8%.
• Q4FY25 inflation was revised to 4.5% from 4.2%, and Q1FY26 inflation was increased to 4.6% from 4.3%.

The central bank reiterated its target to bring inflation down to 4% by Q2FY26, though the road ahead remains challenging.

5. Enhanced Interest Rate Ceilings on FCNR Deposits

To attract foreign capital, the RBI raised interest rate ceilings on FCNR(B) deposits, effective immediately:

• For deposits of 1 to less than 3 years, the ceiling increased to ARR plus 400 bps, up from 250 bps.
• For deposits of 3 to 5 years, the ceiling increased to ARR plus 500 bps, up from 350 bps.

This relaxation, aimed at boosting capital inflows, will remain in effect until March 31, 2025.

Impact and Outlook

The RBI's decisions underscore a balanced approach between managing inflation and sustaining economic growth.

• Liquidity Measures: The CRR cut is expected to improve credit availability, particularly for industries and MSMEs, ahead of the year-end.
• Inflation Control: Tight vigilance on inflation forecasts ensures the central bank remains proactive in policy interventions.
• Growth Concerns: The downward revision in GDP estimates highlights the need for structural reforms to support long-term economic stability.

Conclusion: The latest monetary policy reflects RBI's cautious stance amidst challenging global and domestic environments. While the repo rate freeze provides stability, liquidity measures like CRR cuts are likely to boost economic activities in the short term. However, achieving a 4% inflation target and sustaining growth will require close monitoring of evolving macroeconomic conditions.

Stay tuned for more updates on how these changes will influence India's economic landscape.

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