RBI Holds Repo Rate at 6.5%, Cuts CRR to 4%, Lowers FY25 GDP Growth Forecast to 6.6% {update}

Despite the challenges, Governor Das expressed confidence in India’s long-term growth prospects, saying, “India remains on a path of sustained progress, navigating global uncertainties with a steady hand.” As the RBI continues to monitor inflation and growth, it will likely adjust its policies to ensure the economy remains on a stable and sustainable growth path.

For now, while interest rates remain high, the CRR cut is expected to provide much-needed relief to the banking sector and improve liquidity in the economy.
In its December 2024 meeting, the Reserve Bank of India (RBI) decided to keep the repo rate unchanged at 6.5%. This marks the 11th consecutive time the central bank has held the rate steady. At the same time, the RBI also reduced the Cash Reserve Ratio (CRR) by 50 basis points (bps) to 4%, a move aimed at boosting liquidity in the banking system. The announcement was made by RBI Governor Shaktikanta Das on December 6, 2024.

Why is the RBI Holding the Repo Rate Steady?

The decision to keep the repo rate unchanged is primarily driven by two concerns: inflation and economic growth. In recent months, India has faced rising inflation, which surged to 6.2% in October 2024, breaching the RBI’s tolerance limit. At the same time, economic growth slowed down, with GDP growth dipping to just 5.4% in the July-September quarter.

The repo rate is the rate at which the RBI lends money to commercial banks. A higher repo rate typically reduces inflation but can also slow down economic growth as it makes borrowing more expensive. By keeping the repo rate at 6.5%, the RBI is trying to balance the need to control inflation while ensuring that economic growth doesn’t slow further.

Governor Shaktikanta Das explained that the RBI’s focus is on achieving stability in the economy. “Our job is to act as an anchor of stability and confidence, ensuring that the economy continues to grow at a steady pace,” he said during the announcement.

The Role of the Cash Reserve Ratio (CRR) Cut

Along with holding the repo rate steady, the RBI also made a significant change by slashing the CRR by 50 basis points. CRR is the percentage of a bank’s total deposits that it must keep with the RBI as a reserve. By lowering the CRR from 4.5% to 4%, the RBI is essentially allowing banks to retain more of their deposits for lending and other activities. This is expected to inject approximately ₹1.16 lakh crore into the banking system, providing a boost to liquidity.

The CRR cut is seen as a way to address the liquidity challenges faced by banks, helping them support more economic activity. The RBI’s decision to phase the CRR reduction over two tranches – one in mid-December and the other in late December – ensures that the change is smoothly implemented without creating any sudden disruptions in the market.

Revised Economic Growth and Inflation Forecasts

In addition to the policy rate decisions, the RBI also revised its growth and inflation forecasts for FY25. The central bank lowered its GDP growth estimate for the year to 6.6%, down from an earlier projection of 7.2%. This downward revision reflects the ongoing slowdown in the economy, caused by both domestic factors and global uncertainties.

On the inflation front, the RBI has raised its inflation forecast for FY25. Despite the recent cooling of some prices, the central bank expects inflationary pressures to remain high, particularly due to food prices. Governor Das pointed out that food inflation is expected to ease in the fourth quarter of FY25, as the kharif harvest arrives and stockpiles of cereals remain adequate.

Market Reaction and Impact on Consumers

The market reaction to the RBI’s announcements has been positive, particularly regarding the CRR cut. The stock market, especially banking stocks, has responded well, with several stocks seeing gains. Experts believe that the CRR cut will help improve liquidity, making credit more accessible and potentially supporting economic recovery.

For consumers, the impact of the RBI’s decision to hold the repo rate steady is more indirect. While home loan EMIs will not be immediately affected by the rate decision, the CRR cut may eventually lead to lower lending rates. This could make loans, including home loans and car loans, more affordable in the long run, as banks will have more funds to lend.

Shaktikanta Das Defends the RBI’s Stance

RBI Governor Shaktikanta Das defended the central bank’s cautious approach to rate cuts, saying that the timing of any policy change needs to be carefully considered. “We have to be pragmatic and patient. The right action at the right time will help us achieve maximum impact,” he said.

Das also responded to criticisms about the RBI’s focus on food inflation in its policy decisions. Union Minister Piyush Goyal had recently called it an “absolutely flawed theory” to include food inflation in rate decisions. However, Das explained that high inflation reduces the purchasing power of consumers, which in turn affects demand and overall economic growth. He emphasized that managing inflation was crucial for maintaining economic stability.