RBI Keeps Repo Rate Unchanged at 6.5% for 11th Consecutive Time
The Reserve Bank of India's Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 6.5% for the eleventh consecutive time since February 2023. This decision, reached by a 4-2 majority, reflects the MPC's focus on containing inflation while supporting economic growth. The standing deposit facility (SDF) rate remains at 6.25%, and the marginal standing facility (MSF) rate and bank rate remain unchanged at 6.75%. Governor Shaktikanta Das explained that this decision was based on an assessment of the economy and financial conditions. The committee also maintained its neutral policy stance. Two members – Dr Nagesh Kumar and Professor Ram Singh – voted for a 25 basis points reduction.
GDP Growth Projections Reduced
The Reserve Bank has slightly reduced its real GDP growth forecast for 2024-25 to 6.6% from the earlier forecast of 7.2%. This reduction is attributed to global uncertainties, fluctuating commodity prices, and geo-economic fragmentation.
Quarterly projections for GDP growth are as follows:
- Q3 of 2024-25: 6.8%
- Q4 of 2024-25: 7.2%
- Q1 of 2025-26: 6.9%
- Q2 of 2025-26: 7.3%
Inflation Concerns
Inflation remains a concern, with headline consumer price index (CPI) inflation increasing to 6.2% in October from 5.5% in September. This rise was primarily due to higher food prices and a slight increase in core inflation. The RBI expects food inflation to moderate in the coming months due to seasonal trends, kharif harvest arrivals, and favorable soil and reservoir conditions.
CPI inflation projections for the coming quarters are as follows:
- Q3 of 2024-25: 5.7%
- Q4 of 2024-25: 4.5%
- Q1 of 2025-26: 4.6%
- Q2 of 2025-26: 4.0%
Risks to inflation remain balanced, with concerns about adverse weather events and international agricultural prices.
CRR Reduction to Enhance Liquidity
The MPC announced a reduction in the cash reserve ratio (CRR) for all banks to 4% of net demand and time liabilities (NDTL), implemented in two phases of 25 basis points each, starting from December 14 and December 28, 2024. This measure is expected to release Rs 1.16 lakh crore into the banking system to address potential liquidity stress caused by tax outflows, higher currency demand, and capital flow volatility.
AI Initiatives
The RBI is taking steps to embrace artificial intelligence (AI) while addressing its risks. It plans to establish a committee to develop a framework called FREE-AI (Framework for Responsible and Ethical Enablement of AI) in the financial sector. Additionally, the RBI Innovation Hub in Bengaluru has introduced an AI-powered solution named MuleHunter.AI to help banks identify and manage mule accounts, often used in digital frauds. The next meeting of the MPC is scheduled for February 5-7, 2025. The RBI’s latest announcements reflect its cautious approach to balancing inflation and growth while ensuring financial stability through measures like liquidity management and AI adoption.