RBI keeps key lending rate unchanged at 6.5%, focus remains on tackling inflation
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has decided to maintain.
The status quo on key interest rates for the 11th consecutive time. The decision reflects the central bank’s focus on containing inflation, which remains above its comfort zone. “The Monetary Policy Committee decided by a majority of 4-2 to keep the policy repo rate unchanged at 6.5%. Consequently, the standing deposit facility (SDF) stands at 6.25%, and the marginal standing facility (MSF) and the bank rate at 6.75%,” announced RBI Governor Shaktikanta Das during the policy statement.
The MPC has retained its neutral stance, underscoring its commitment to achieving a durable alignment of inflation with the target range of 2-6%.
INFLATION-GROWTH BALANCE
Governor Das highlighted that while the MPC acknowledged a slowdown in economic growth during the second quarter, it found the growth outlook to be resilient. However, the committee stressed the need for close monitoring of economic indicators as risks persist. Despite this cautious optimism about growth, inflation remains the MPC’s top priority. Inflation surged beyond the RBI’s upper tolerance threshold of 6% in October, primarily driven by food prices.
Das warned that food inflation pressures are unlikely to ease significantly until the fourth quarter of the current financial year. “Tackling inflation is critical because high inflation reduces consumers’ disposable income, adversely affecting private consumption, which is a key driver of real GDP growth,” Das explained.
LOWERS GDP GROWTH PROJECTION
In light of recent economic developments, the RBI has revised its GDP growth target for the current financial year to 6.6%, down from earlier estimates. The inflation projection, meanwhile, has been set at 4.8%. Das highlighted that restoring the inflation-growth balance is crucial for ensuring sustainable economic stability. “The MPC believes that only with durable price stability can strong foundations be laid for high growth,” he stated.
CRR BOOST
One of the most important announcements made by the RBI Governor was about the reduction in Cash Reserve Ratio or CRR. It has been reduced to 4% from 4.5% and is expected to provide a much-needed liquidity boost. “It has been decided to reduce the cash reserve ratio (CRR) of all banks by 50bps in two equal tranches of 25 bps each to 4.0% of net demand and time liabilities (NDTL) with effect from the fortnight beginning December 14, 2024 and December 28, 2024, respectively,” Das said.
“This will restore the CRR to 4% of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022. This reduction in the CRR would release primary liquidity of about Rs 1.16 lakh crore to the banking system,” he added.
WHAT NEXT?
As the RBI continues its battle against inflation, experts suggest that its neutral stance provides flexibility to respond to changing economic conditions. However, the effectiveness of these measures will depend on external factors such as global commodity prices and domestic supply-side interventions.