The Reserve Bank of India (RBI) is set to announce its latest RBI Monetary Policy decision on Friday, December 6, 2024, following a crucial three-day meeting of the Monetary Policy Committee (MPC), which began on Wednesday. Headed by RBI Governor Shaktikanta Das, the committee will decide the next course of action regarding the repo rate, a key tool used to control inflation and stimulate economic activity. With inflation remaining high and GDP growth showing signs of weakness, experts anticipate that while the repo rate may remain unchanged, adjustments to other tools like the Cash Reserve Ratio (CRR) could be on the table.
Economic Pressures and RBI’s Current Stance
Since February 2023, the RBI Monetary Policy has maintained the repo rate at 6.5%, following a series of rate hikes in 2022 and early 2023. The government has tasked the RBI with keeping consumer price index (CPI)-based inflation at 4%, with a margin of 2% on either side. However, inflationary pressures remain, with retail inflation hitting a 14-month high of 6.21% in October 2024, mainly driven by rising food prices. Although inflation has been trending below the RBI’s upper tolerance level of 6% since September 2023, the spike in food costs has raised concerns.
In contrast, economic growth has slowed, reaching a seven-quarter low of 5.4% for the July-September 2024 quarter. This deceleration is attributed to poor performance in the manufacturing and mining sectors, prompting fears of a prolonged slowdown. Despite these challenges, experts suggest that the RBI might hold off on cutting the repo rate for now, given the persistent inflationary risks.
Potential CRR Cut and Rate Outlook
While the repo rate may remain stable, analysts believe the RBI could ease liquidity conditions by lowering the CRR. The CRR is the proportion of deposits that commercial banks must hold in reserve, and a reduction would free up funds for lending, thereby stimulating economic activity. According to economists, a 50-basis point cut in the CRR could likely inject around 1.1 trillion rupees ($12.98 billion) into the banking system.
Suman Chowdhury, Executive Director and Chief Economist at Acuité Ratings, stated that the economic outlook remains uncertain, with growth prospects weak and inflationary concerns still prevalent. He forecasts that the RBI might cut the CRR to 4% from its current level of 4.5%, potentially between December 2024 and February 2025. On the other hand, Nomura economists suggest a possible 25-basis point reduction in the repo rate, citing weaker growth and a relatively benign inflation outlook for the year ahead. If implemented, it would mark the first rate cut since May 2020.
As India faces mixed economic signals, the RBI Monetary Policy decision will be crucial in determining how it navigates the balance between fostering growth and controlling inflation in the coming months. The meeting marks the final policy review under Governor Shaktikanta Das’s current term, which concludes on December 10, 2024.
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