Reserve Bank of India (RBI)'s Monetary Policy Committee (MPC) in its Dec 2024 meeting, voted with 4:2 majority to keep the repo rate unchanged at 6.50% and maintained the monetary stance of ‘neutral’. However, MOC has decided to cut the Cash Reserve Ratio (CRR) by 50 bps to 4% from 4.5%. The action taken will infuse Rs 1.16 lakh crores into the system. Market was expecting cut in CRR with rate cut as can be seen from last two days of bull rally in Bank nifty. The Banking index rose by more than 600 points as soon as the governor announced cut in CRR ratio.
Justifying his decision, the governor stressed the importance of price stability and macroeconomic stability for the economy. CPI inflation data that was released for month of November came in above RBI’s tolerance band of 6%, driven by a sharp uptake in food inflation. He also mentioned that inflation is expected to stay higher in Q3 of current FY and might start easing only from Q4. Good harvesting season and reservoir levels would be critical to the softening of food inflation pressures. Inflation and moreover, food inflation reduces disposable income in the hands of consumers and damages private consumption, negatively impacting real GDP growth.
The committee member has taken note of the recent slowdown in the growth momentum. Therefore RBI has revised real GDP growth target for FY25 to 6.6% from 7.2% earlier, with Q3 growth seen at 6.8% and Q4FY25 growth at 7.2%. Q1FY26 GDP growth is seen at 6.9% and Q2FY26 GDP growth is seen at 7.3%. The committee has upped the CPI inflation projection for FY25 to 4.8% from its earlier projection of 4.5%.
MPC noted that recent GDP numbers has come lower than anticipated due to a substantial deceleration in industrial growth. The weaknesses in the manufacturing sector were limited to specific sectors, which are expected to see an impetus on strong festival demand, pickup in rural areas and pick-up in government capex.
The Governor has announced several policy changes; including raising interest rate ceilings on FCNR-B deposits by 400 bps and increasing FCNR deposit rates. These moves aim to make India a more attractive destination for foreign investments. The limit of collateral free agriculture loans was increased to Rs 2 lakh per borrower, taking into account the rise in agricultural input costs and overall inflation.
