On December 6, 2024, the Reserve Bank of India (RBI) unveiled its latest monetary policy decisions following a three-day meeting of the Monetary Policy Committee (MPC) that started on December 4. The key members of the MPC include RBI Governor Shaktikanta Das, Deputy Governor Michael Debabrata Patra, Executive Director Rajiv Ranjan, Director of the Delhi School of Economics Ram Singh, Economist Saugata Bhattacharya, and Nagesh Kumar, Director at the Institute for Studies in Industrial Development.
Key Monetary Policy Decisions
1. The policy repo rate remains unchanged at 6.50% under the Liquidity Adjustment Facility (LAF).
2. The Standing Deposit Facility (SDF) rate stays at 6.25%, while the Marginal Standing Facility (MSF) rate and Bank Rate are maintained at 6.75%.
3. The MPC decided to maintain a neutral stance, balancing inflation control and growth promotion with a target of 4% CPI inflation (with a margin of ±2%) over the medium term.
Growth Outlook
- The global economy is stable but growing slowly, with inflation on the decline, though geopolitical risks and trade uncertainties continue to affect global markets.
- India’s GDP growth in Q2 2024-25 was lower than expected at 5.4%, primarily due to reduced private consumption and investment, though government spending picked up.
- The services and agriculture sectors showed resilience, while weak industrial activity (manufacturing, electricity, mining) dampened overall growth.
- Positive factors include strong kharif production, favorable rabi prospects, and improving industrial activity.
- Real GDP growth is projected at 6.6% for 2024-25, with Q3 at 6.8%, Q4 at 7.2%, and H1 2025-26 at 6.9% (Q1) and 7.3% (Q2).
Inflation Outlook
- CPI inflation rose to 6.2% in October, above the tolerance limit, driven by higher food prices and rising core inflation.
- Food inflation is expected to ease in Q4, supported by seasonal vegetable price declines and favorable harvest conditions.
- Upside risks to inflation include adverse weather, rising global agricultural prices, and potential increases in energy costs.
- CPI inflation for 2024-25 is projected at 4.8%, with Q3 at 5.7%, Q4 at 4.5%, and H1 2025-26 at 4.6% (Q1) and 4.0% (Q2).
- Risks to both growth and inflation are considered balanced.
Other Key Announcements
- The Cash Reserve Ratio (CRR) was reduced by 50 basis points to 4%, lowering the reserve requirement for banks and releasing more funds into the economy.
- The RBI also raised the interest rate ceilings on FCNR-B deposits to encourage foreign capital inflows.
- India has seen net Foreign Portfolio Investment (FPI) inflows of $9.3 billion in FY25 so far, despite a general decline in FPI inflows to emerging markets.
Rationale Behind the Decisions
- Since October, India’s inflation and growth outcomes have become less favorable. The RBI noted that economic activity is expected to improve, driven by better business and consumer sentiments reflected in surveys.
- However, inflation risks remain elevated due to overlapping shocks, geopolitical uncertainties, and market volatility, which affect consumer purchasing power, particularly in rural and urban areas.
- Durable price stability is crucial for long-term high growth, prompting the MPC to maintain the repo rate at 6.50%.
- The MPC’s neutral stance allows for flexibility in responding to future economic conditions.
Votes on Policy Decisions
- Repo rate decision: The majority, including Shaktikanta Das, Saugata Bhattacharya, Rajiv Ranjan, and Michael Debabrata Patra, voted to keep the repo rate unchanged, while Nagesh Kumar and Ram Singh voted to reduce the rate by 25 basis points.
- Neutral stance decision: There was unanimous support from all members to continue with the neutral stance.
Additional Announcements
- The collateral-free loan limit for the agriculture sector has been raised to Rs 2 lakh per borrower from the previous Rs 1.6 lakh.
- Small finance banks are now allowed to extend pre-sanctioned credit lines through UPI.
- A new tool, Mule-Hunter AI, has been launched to detect and prevent mule accounts.
- The RBI will also introduce podcasts to enhance information dissemination to the general public.
Next MPC Meeting
The next MPC meeting is scheduled for February 5-7, 2025.
These decisions reflect the RBI’s focus on managing inflation while supporting economic growth amidst global uncertainties.
