IGI Logo

RBI keeps repo rate unchanged; cuts CRR by 50bp

Rate cuts could begin from Feb’25 or later

* The Reserve Bank of India (RBI) announced its fifth bi-monthly monetary policy for FY25 on 6th Dec'24. The rate-setting panel decided to keep the benchmark repo rate unchanged at 6.5% for the 11th consecutive meeting, with four out of six members voting in favor. Dr. Nagesh Kumar and Prof. Ram Singh voted to reduce the policy repo rate by 25bp.

* The MPC unanimously decided to keep the ‘neutral’ stance. The Governor mentioned that "a growth slowdown – if it lingers beyond a point – may need policy support" but also that “the gains achieved so far in the broad direction of disinflation, notwithstanding the recent upticks, need to be preserved”.

* Simultaneously, the RBI decided to reduce the cash reserve ratio (CRR) of all banks to 4.0% of net demand and time liabilities (NDTL) in two equal tranches of 25bp each, with effect from the fortnights beginning 14th Dec’24 and 28th Dec’24. This was announced to ease the potential liquidity stress.

* As real GDP growth turned out to be much slower than anticipated, the RBI downgraded its projections to 6.6% for FY25 (from 7.2% earlier) with 3Q/4QFY25/1QFY26 at 6.8%/7.2%/6.9% (from 7.6%/7.4%/7.3% earlier). Real GDP growth is projected at 7.3% in 2QFY26, with risks broadly balanced. At the same time, higher headline inflation in Sep’24 and Oct’24, led by food items, pushed RBI’s projections higher. Taking into consideration all the factors, the inflation is projected at 4.8% for FY25 now (from 4.5% earlier) with 3Q/4QFY25/1QFY26 at 5.7%/4.5%/4.6% (from 4.8%/4.2%/4.3% earlier). Headline inflation is projected at 4.0% in 2QFY26, with risks broadly balanced.

* Overall, although the RBI has revised down its growth projections, it expects the growth to recover to 7% YoY in 2HFY25, higher than our forecast of sub-6%. At the same time, while we expect the headline inflation to be closer to 5.7% in 3QFY25, it could be higher than the RBI’s projection in 4QFY25. Consequently, the combination of weak growth and high inflation could present itself in the next monetary policy also. Therefore, while rate cuts could begin from Feb’25, it is not a foregone conclusion.

I. MPC keeps repo rate unchanged; cuts CRR by 50bp to 4%

* The rate-setting panel decided to keep the benchmark repo rate unchanged at 6.5% for the 11th consecutive meeting. Two out of six members – Dr. Nagesh Kumar and Prof. Ram Singh – voted to reduce the policy repo rate by 25bp.

* The MPC unanimously decided to keep the ‘neutral’ stance. The Governor mentioned that "a growth slowdown – if it lingers beyond a point – may need policy support" but also that “the gains achieved so far in the broad direction of disinflation, notwithstanding the recent upticks, need to be preserved”.

* Simultaneously, the RBI decided to reduce the cash reserve ratio (CRR) of all banks to 4.0% of net demand and time liabilities (NDTL) in two equal tranches of 25bp each, with effect from the fortnights beginning 14th Dec’24 and 28th Dec’24.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412