RBI Monetary Policy: Central bank holds repo rates for the 11th consecutive time at 6.5%

Mumbai: The Reserve Bank of India's monetary policy committee (MPC) kept both policy rates and its stance unchanged on Friday, but sharply lowered its growth estimate for the full year to 6.6% from 7.2% earlier.

Four out of the six-member rate-setting panel voted to keep repo unchanged at 6.5%, while the remaining two--Nagesh Kumar and Ram Singh--voted for a cut of 25 basis points. The MPC unanimously voted to keep the stance unchanged at neutral. A basis point is one-hundredth of a percent. This is the 11th consecutive time that the MPC kept the rates unchanged

RBI also announced measures to support rupee liquidity in the system. It cut the cash reserve ratio (CRR) by 50 basis points for the first time in four years to ease monetary conditions as the economic growth slows. CRR is the percentage of a bank's total deposits that it is required to maintain in liquid cash with RBI as a reserve.

Second, RBI announced a temporary 150bps hike in deposit rate ceiling for non-resident Indians (NRIs), applicable until end March 2025, to attract more capital flows.

Speaking at the post-policy press conference, governor Shaktikanta Das acknowledged the Q2FY25 GDP growth slowdown miss, but noted that inflation has to be brought down to achieve high growth. GDP growth slowed unexpectedly to 5.4% in July-September, its slowest pace in seven quarters. Das, however, sounded confident about a revival in the second half of the current fiscal year.

“The MPC has adopted a prudent and cautious approach in this meeting to wait for better visibility on the growth and inflation outlook. At such a critical juncture, prudence, practicality and timing of decisions become even more critical,” he said.

The spike in inflation in October and the expectation of an elevated print in November also caused the MPC to revise its FY25 CPI projection to 4.8% for FY24-25 from 4.5% earlier. While the MPC expects a reversal in vegetable prices, it flagged risks of rising input costs.

The decision to normalize CRR to 4% of net demand and time liabilities (NDTL) in two equal tranches (of 25 bps each) on 14 December and 28 December will release ₹1.16 trillion of liquidity in the system. Liquidity is expected to remain tight this month on tax-related outflows and increase in currency in circulation and forex outflows.

According to Radhika Rao, chief economist with DBS Bank, the CRR cut could translate to a 2- to 6-basis-point improvement in domestic banks’ net interest income.

With inflation coming off and growth expected to be lower than RBI's revised estimate in the second half, analysts expect a policy pivot by the MPC from February onwards.

“Going forward, as the worst of quarterly growth reading and peak inflation seem to be behind us, we expect the MPC to derive comfort from the same and commence rate easing from February 2025, cutting the policy repo rate by 25bp, as inflation moderates closer to target and growth may still fall short of the MPC's forecast. We see a cumulative 100bp of rate cuts in the easing cycle, taking the policy repo rate to 5.5% by March 2026. Post February 2025, we expect three more cuts of 25bp each in April, August, and February 2026,” said Barclays in its report.

Meanwhile, when asked whether his term as the head of the central bank would be extended, Das said, “I am not giving you any headlines.”

There has been speculation about the Centre extending Das's term for a third time. That would make him the longest-serving RBI governor since the 1960s. He completes his current term on 10 December.