On December 6, 2024, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), chaired by Governor Shaktikanta Das, announced key decisions impacting the nation’s economic landscape.

Key Policy Rates Unchanged

The MPC has maintained the benchmark repo rate at 6.5% for the eleventh consecutive meeting.This decision reflects the RBI’s commitment to balancing inflation control with economic growth.The standing deposit facility (SDF) rate remains at 6.25%, and both the marginal standing facility (MSF) rate and the bank rate are steady at 6.75%.

Cash Reserve Ratio Adjustment

In a move to enhance liquidity, the RBI reduced the cash reserve ratio (CRR) by 50 basis points, bringing it down to 4%. This reduction is set to occur in two phases: a 25 basis point cut effective December 14, followed by another 25 basis point cut on December 28.This marks the first CRR cut since March 2020 and is expected to infuse approximately ₹1.1 trillion into the banking system, thereby facilitating increased lending and potentially lowering market interest rates.

Inflation and Growth Outlook

The RBI has revised its Consumer Price Index (CPI)-based inflation projection for FY25 to 4.8%, up from the previous estimate of 4.5%.This adjustment accounts for persistent food price pressures and recent inflationary trends.Concurrently, the central bank has lowered its real Gross Domestic Product (GDP) growth forecast for FY25 to 6.6%, down from the earlier projection of 7.2%.This revision follows a slowdown in GDP growth to 5.4% in the July-September quarter, the lowest in seven quarters, attributed to weaker manufacturing and consumption sectors.

Governor’s Remarks

Governor Shaktikanta Das emphasized the importance of monitoring incoming data to confirm a decline in inflation, stating, “Prudence and practicality demand that we remain sensitive to the dynamically evolving situation.”He also noted that while core inflation remains subdued, the near-term outlook is influenced by food price pressures, with expectations of seasonal corrections in vegetable prices during the winter months.

Market Reactions

Financial markets have responded positively to the CRR cut, anticipating improved liquidity conditions.The benchmark 10-year bond yield has experienced a decline, reflecting investor optimism about the RBI’s measures to support economic growth amid inflationary concerns.

These policy decisions underscore the RBI’s strategic approach to fostering economic stability by addressing liquidity needs and adjusting growth and inflation forecasts in response to evolving economic indicators.