RBI Policy Meeting December 2024: Key Highlights & Insights

RBI Monetary Policy | The Reserve Bank of India (RBI) concluded its latest monetary policy meeting on December 6, 2024, with some notable updates. Let’s break down the key takeaways from the December policy update.

1.      Repo Rate and Policy Stance Unchanged

The Monetary Policy Committee (MPC) decided to maintain the repo rate at 6.5% for the eleventh consecutive time. This decision reflects the RBI's balanced approach in fostering growth while controlling inflation. The policy stance remains ‘neutral,’ signaling a cautious but flexible approach to economic conditions.

• Standing Deposit Facility (SDF) rate remains unchanged at 6.25%.
• Marginal Standing Facility (MSF) and Bank Rate are held steady at 6.75%.

This decision aligns with the RBI’s ongoing objective of achieving a medium-term inflation target of 4% (with a tolerance band of +/- 2%) while supporting economic growth.

2.      Cash Reserve Ratio (CRR) Cut: Impact on Liquidity & Banking Sector

In a significant move to boost liquidity and encourage lending, the RBI announced a 50 basis points reduction in the Cash Reserve Ratio (CRR), lowering it to 4% for all banks. This change will allow banks to retain more of their funds, enhancing their lending capacity and providing a stimulus to the economy.

• The CRR cut will occur in two phases: 25 basis points on December 14, 2024, and another 25 basis points on December 28, 2024.
• This adjustment is expected to increase liquidity by Rs 1.16 lakh crore.

The banking sector stands to benefit from improved liquidity, potentially leading to better Net Interest Margins (NIMs) and Return on Assets (RoA).

3.      Revised FY25 GDP Growth Forecast: Economic Outlook for 2025

Despite global economic challenges, India’s economy is showing resilience, although growth expectations for FY25 have been revised downward. The RBI now forecasts FY25 GDP growth at 6.6%, down from the previous estimate of 7.2%. This revision follows weaker-than-expected growth of 5.4% in Q2FY25, driven by lower private consumption and investment.

• Q3FY25 GDP growth forecast revised to 6.8% (down from 7.4%)
• Q4FY25 GDP growth forecast revised to 7.2% (down from 7.4%)
• Q1FY26 GDP growth forecast revised to 6.9% (down from 7.3%)

Looking further ahead, the RBI expects GDP to grow at 7.3% in Q2FY26, reflecting a positive outlook over the medium term.

4.      Inflation Outlook: CPI and Food Prices to Moderate

Inflation continues to be a key concern, with CPI inflation rising to 6.2% in October 2024 from 5.5% in September. The uptick in inflation is largely due to a sharp rise in food prices, with core inflation also contributing to the increase.

However, the RBI is cautiously optimistic about inflation in the coming quarters. The central bank anticipates food inflation to soften in Q4FY25 due to the seasonal easing of vegetable prices and favorable harvest conditions.

• CPI inflation for FY25 is projected at 4.8%, with Q3 at 5.7% and Q4 at 4.5%.
• For Q1FY26, CPI inflation is expected to be 4.6%, easing further to 4.05% in Q2FY26.

While energy prices have softened, ongoing risks from adverse weather events and global agricultural price trends need to be monitored.

Rationale Behind the RBI’s Monetary Policy Decisions

The MPC’s decision to keep the repo rate unchanged stems from the need to balance inflation control with economic growth. Instead of making a big splash with a rate cut, the RBI chose to add liquidity, which is a safer move while inflation is still unpredictable.

By adopting a neutral stance, the RBI is leaving itself room to adjust as the economy evolves. This gives the committee the flexibility to keep an eye on both inflation and growth, making policy tweaks as needed. The MPC stressed that stable prices are key for long-term economic growth, and it’s committed to bringing inflation in line with the target while supporting overall expansion.

That said, we may not be far from possible rate cuts. The RBI’s decision to trim its GDP growth forecast for FY25 by 60 basis points to 6.6% hints that a rate cut could be on the horizon, maybe even as soon as February.

What’s Next from the RBI?

The minutes of the MPC meeting will be released on December 20, 2024.

The next MPC meeting is scheduled for February 5-7, 2025, where further decisions on monetary policy will be made, depending on the evolving economic landscape. 

Frequently Asked Questions (FAQs)

• What is repo rate and how does it impact the economy?

Repo rate is the interest rate at which the RBI lends money to commercial banks. A higher repo rate typically makes borrowing more expensive for banks, which can lead to higher interest rates for consumers and businesses, thus slowing down spending and investment.

Conversely, a lower repo rate encourages borrowing and spending by making loans cheaper, which can help stimulate economic activity. The repo rate is one of the primary tools used by the RBI to control inflation and manage overall economic growth.

• What is Cash Reserve Ratio (CRR)?

The Cash Reserve Ratio (CRR) is the portion of a bank's total deposits that it must hold in reserve with the RBI, rather than lending it out. A reduction in the CRR means that banks have more money available to lend, which can increase liquidity in the economy and stimulate growth.

By adjusting the CRR, the RBI can influence how much banks can lend and, in turn, affect interest rates, credit availability, and economic activity. It’s a vital tool for managing inflation and ensuring the stability of the banking system.

• How are Net Interest Margins (NIM) and Return on Assets (RoA) calculated?

Net Interest Margin (NIM) is calculated by subtracting interest expenses from interest income and dividing the result by the average earning assets of the bank. It’s a measure of how effectively a bank is generating profit from its interest-bearing assets.

Return on Assets (RoA) is calculated by dividing the bank’s net income by its total assets. It measures how efficiently a bank is using its assets to generate profits. When the RBI cuts the CRR, banks have more liquidity, which can help them extend more loans and improve their NIM. A boost in lending activity can also improve RoA by increasing the overall return on the assets the bank holds.

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