RBI concluded the December 2024 monetary policy committee meeting with a cautious and balanced approach to controlling challenges in the country’s economy. Even though high inflation and slowdown of growth were matters of concern, the central bank has taken an easy way out by not cutting the main policy rate, repo rate, but increasing other supportive liquidity and banking sector stability measures.

Let’s dive into the key decisions and their implications.

Repo Rate Kept Static

RBI Governor Shaktikanta Das announced that the repo rate would remain at 6.5%, marking the 11th consecutive instance of the rate being held steady. The decision aligns with the RBI’s neutral policy stance, aiming to strike a balance between controlling inflation and fostering economic growth.

Governor Das clarified that by not changing the repo rate currently, the RBI can easily track the trends of inflation and economic situations. Since it doesn’t make such sudden changes, the central bank intends to provide businesses and consumers with stability and predictability amid current uncertainties.

GDP Growth Projection Revised

One of the key announcements from the MPC meeting was the downward revision of India’s GDP growth projection for FY 2024-25. The RBI cut its forecast from 7.2% to 6.6%, citing a sharper-than-expected slowdown in economic activity.

The latest GDP data disclosed a seven-quarter low to 5.4% in the July-September quarter. It has alarmed the deceleration into the overall trajectory of the Indian economic recovery, so the central bank adopted more conservative views.

CRR Slashed to Boost Liquidity

In a bid to address tightening liquidity in the banking system, RBI reduces the Cash Reserve Ratio (CRR) by 50 basis points to a level of 4 percent from 4.5 percent. This would translate into infusing about ₹1.16 lakh crore into the banking system and making banks more capable of lending.

The CRR is the part of deposits that banks must hold in the RBI without earning interest. Lowering the CRR frees up funds that banks can use to lend, which may promote economic growth.

Why Was the CRR Cut?

The decision to slash the CRR comes against the backdrop of a liquidity crunch caused by the RBI’s measures to stabilize the rupee. Dollar sales by the central bank to support the currency have strained liquidity. Additionally, December is a period of heightened liquidity demands due to advance tax payments, GST outflows, and quarter-end credit requirements.

The cuts in CRR ease the burden, making sure that banks have adequate amounts for siphoning off against lending requirements. As banks are able to enjoy the excess liquidity, there is even a possibility for this saving to be transmitted downward to the borrowers as reductions in lending rates.

Implication on the Banking Sector

The CRR cut would be net interest margin accretive for banks, making them more profitable. So, with ₹1.16 lakh crore freed up, they’ll have more room to spend on lending or investments.

By cutting CRR, the RBI has given banks an opportunity to increase their lendable capacity,” said VRC Reddy, Head of Treasury at Karur Vysya Bank. “This could result in banks lending more that would help boost economic growth.”

More importantly, this will also lighten the credit availability for businesses as well as consumers, hopefully boosting demand in key industries.

Inflation and Monetary Policy

High inflation remains a pressing concern for the RBI, influencing its cautious approach. The central bank’s focus is on ensuring price stability while supporting economic growth.

The unchanged repo rate reflects the RBI’s assessment that any premature rate hikes could stifle growth further, particularly in a period of economic slowdown. At the same time, the central bank remains vigilant, ready to intervene if inflationary pressures intensify.

Outlook for FY 2025-26

Looking ahead, the RBI projected GDP growth for FY 2025-26 at 6.6%. This reflects the central bank’s expectation of a gradual recovery supported by accommodative policies and structural reforms.
However, external factors such as global economic conditions, geopolitical uncertainties, and commodity price fluctuations will play a significant role in shaping India’s growth trajectory.

Key Takeaways

Repo rate stability: In effect, keeping the repo rate is a bet on keeping the central bank neutral and allowing growth to find its way towards solving inflation.
Boost in Liquidity: The decrease in CRR injects much-needed liquidity into the banking system, enhances credit availability, and potentially reduces borrowing costs.
Downsized Growth Projection: A lower level of GDP growth forecast warns one of caution as the performance of the economy is slowing down.
Focus on Inflation Management: High inflation continues to be a challenge; the RBI is keeping watchful eyes on future monetary moves.

Conclusion

The December 2024 MPC meeting reflects the Reserve Bank of India’s efforts in trying to navigate a complex economic landscape. While the steady repo rate reflects a commitment to stability, the reduction in CRR is a proactive measure to deal with liquidity constraints and spur growth.

As the Indian economy faces headwinds in the form of slowing growth and persistent inflation, the central bank’s calibrated approach would provide a foundation for recovery while ensuring financial stability.

In the coming months, all eyes will be on how these policy measures translate into tangible outcomes, particularly in sectors like banking, manufacturing, and services. With a cautious yet forward-looking stance, the RBI has laid the groundwork for navigating these challenges effectively.

What do you think about the RBI’s latest decisions?

Do you think these measures will help spur growth while keeping inflation in check?

Let us know in the comments below!