The Reserve Bank of India-led Monetary Policy Committee announced its decision to keep the repo rate unchanged at 6.5% and maintained the stance as “neutral” with a majority of 4:2 votes. The Liquidity Adjustment Facility was kept at 6.50%, Standing Deposit Facility (SDF) remains 6.25% and the Marginal Standing Facility (MSF) and Bank rate are being held at 6.75%.
This policy decision was made with the intention to stay focused on “durable alignment of inflation with the target, while supporting growth”, as per the policy statement shared by the central bank on its official website.
The central bank strives to bring down the retail inflation, also known as the Consumer Price Index (CPI), to the target of 4%, with a tolerance band of +/- 2% (2% to 6%), over the medium term.
“Shri Saugata Bhattacharya, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to keep the policy repo rate unchanged at 6.50%. Dr. Nagesh Kumar and Professor Ram Singh voted to reduce the policy repo rate by 25 basis points,” stated the policy statement. All members voted to maintain the neutral stance.
GDP estimates
The domestic Gross Domestic Product (GDP) was seen lower than expected in the second quarter of the current financial year at 5.4% due to a slump in private consumption and investment even as government spending picked up post election.
Weakness in manufacturing, mining and electricity sectors kept the GDP in check but recovery is expected on the back of good rabi crop harvests and a pick up in industrial activity and services sector growth. Acceleration in investment activity is also likely to be seen.
Moreover, world trade prospects remain stable, providing support to the external demand and exports. Meanwhile, geopolitical tensions and fluctuations in commodity prices may affect the outlook negatively. Keeping these factors in mind, the Reserve Bank of India has projected real GDP growth of 6.6% for FY2024-2025 with 6.8% growth in Q3 and 7.2% in Q4. For Q1FY26, GDP growth is estimated to be 6.9%, followed by 7.3% growth in Q2FY26.
Inflation outlook
The headline Consumer Price Index (CPI) surpassed the tolerance band in October and was seen at 6.2%, despite being 5.5% in September and below 4% in July as well as August. The recent uptick was caused by the food price shocks and higher Core inflation (excluding food and fuel).
Food inflation is expected to simmer down in Q4FY25 due to seasonal easing in vegetable prices coupled with kharif harvest arrivals, good soil moisture conditions, as well as sufficient reservoir levels which will support rabi crop production. However, unfavourable weather conditions and surge in international agricultural commodity prices may pose a risk to food inflation levels.
Considering all these factors, the CPI inflation rate for FY2024-2025 is predicted to be 4.8% with Q3FY25 at 5.7% and Q4FY25 at 4.5%. For FY2026, the first quarter CPI is expected to be 4.6% followed by 4% in the second quarter.
CRR cut
The central bank opted to slash the Cash Reserve Ratio to 4% of the Net Demand and Time Liabilities (NDTL) for all banks. It will be reduced in two equal tranches of 25 basis points (0.25%) each fortnight, starting on December 14, 2024 and December 28, 2024. This will free up primary liquidity of approximately ₹1.16 lakh crore to the banking system.
Additional details
The Reserve Bank of India will publish the minutes of the MPC’s meeting on December 20, 2024 and the next meeting will be held during February 5 to February 7, 2025.
Impact on Stock Markets
The much-awaited policy decision by the Reserve Bank of India turned out to be a non-event as they maintained a status quo. The NSE’s Nifty50 and the BSE’s Sensex saw a small spike at the beginning of Governor Das’ speech but the momentum fizzled out shortly. The banking barometer, the NSE’s Banknifty saw an uptick of about 0.50% when the CRR cut was announced but has settled back to trade flat.
Investors keen on share market investments must keep abreast of such regulatory and policy announcements as they are key to fundamentals of the equity markets and have a strong hold on the sentiments of the big players in the financial markets.
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