RBI MPC Meeting 2024: Repo Rate Unchanged At 6.5%, Policy Stance Neutral

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday decided to keep the repo rate unchanged with a majority of 4:2 for the 11th consecutive meeting. Announcing the repo rate, RBI governor Shaktikanta Das cited corners over inflation and the uncertain growth outlook as driving factors behind keeping the key lending rate unchanged.

RBI kept the repo rate unchanged to continue with the neutral stance of the policy and to monitor the outlook on inflation and growth. “Monetary policy is important because it affects the lives of people, economy, big corporates, middle class, farmers. It has a wide-ranging impact on the economy,” Das said.

Additionally, the RBI has also cut the cash reserve ratio (CRR) by 50 basis points to 4 per cent. Says Arsh Mogre, Economist Institutional Equities, PL Capital - Prabhudas Lilladher, “The RBI’s December MPC decision reflects a delicate balancing act between addressing domestic liquidity challenges and managing external vulnerabilities. By maintaining the repo rate at 6.5 per cent and implementing a 50 bps CRR cut to 4 per cent, the central bank has infused Rs 1.16 lakh crore into the banking system, directly targeting the acute liquidity deficit caused by rupee depreciation and capital outflows. This demonstrates a tactical response to near-term pressures without prematurely altering the broader monetary stance."

Adds Madhavi Arora, Lead Economist, Emkay Global Financial Services, "Policy tradeoffs have become even more perplexing with the emerging cracks in the domestic story with the economy stuck in a stagflationary state. And given the challenges around timing and window of conventional rate cuts, and FX cost of rate cuts (liquidity implication/sterilization cost, and imported inflation amidst fluid global dynamics), a CRR cut of 50bp was the least costly measure for them."

"And given the challenges around timing and window of conventional rate cuts, and FX cost of rate cuts (liquidity implication/sterilization cost, and imported inflation amidst fluid global dynamics), a CRR cut of 50bp was the least costly measure for them," Arora says.

Says Raghvendra Nath, MD, Ladderup Wealth Management, "A cut in the CRR by 50 basis points is expected to enhance liquidity in the banking system and support credit growth."

Adds Vivek Iyer, Partner, Grant Thornton Bharat, "The move in my view is a right signal that is being sent to the market that the RBI will not keep its eye off inflation but at the same time it doesn’t want to compromise growth. It’s a tightrope walk that RBI is deftly undertaking."

"Investors should put fixed deposits for a period of 4 months to 6 months as the interest rate is expected to remain the same for the same period. Inflation risks not only need to go down but to remain at those levels sustainably for the RBI to consider rate reduction and an accommodative stance and this will atleast take 4 to 6 months," Iyer suggests.

On the gross domestic product growth front, the central bank has projected India's GDP growth in the financial year 2025 to be 6.6 per cent. The third-quarter (Q3) forecast is 6.8 per cent, while the fourth-quarter (Q4) forecast is 7.2 per cent. RBI governor says indicators suggesting a slowdown in the economy in Q2 have bottomed out.

The RBI has revised this GDP growth forecast for FY24 down from 7.2 per cent (as projected earlier). "In light of the recent rise in inflation and sluggish GDP growth in Q2, RBI Governor has emphasised the importance of a flexible approach to targeting inflation while balancing growth," Nath states.

Further, RBI has projected inflation to be 4.8 per cent in the financial year 2024-25. The Q3 forecast for inflation is 5.7 per cent and the fourth-quarter forecast is 4.5 per cent.

“The last mile of global disinflation is turning out to be prolonged,” the RBI Governor said in his address.

Das further noted that the RBI’s hawkish outlook on inflation was due to persistently high food inflation, which is yet to stabilise. However, the optimism is upbeat on India’s growth outlook, supported by good monsoons and the expected revival of capital expenditure.

Adding to this Nath says, "Moving forward, we anticipate that supporting growth will become a priority, provided there are no significant negative shocks to inflation. Considering all these factors, we believe that the RBI will initiate a rate cut cycle starting in February 2025."