Repo Rate Unchanged, RBI Lowers GDP Growth Projection to 6.6%, CRR to 4%
Moneylife Digital Team 06 December 2024

For the 11th consecutive time, the monetary policy committee (MPC) of Reserve Bank of India (RBI) decided to maintain the status quo on the repo rate, the central bank's rate for short-term loans to banks, unchanged at 6.5%. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the bank rate at 6.75%. At the same time, RBI decided to cut the cash reserve ratio (CRR) by 50bps (basis points) to 4%. The central bank also cut its gross domestic product (GDP) growth projection to 6.6% from the earlier forecast of 7.2%.

RBI governor Shaktikanta Das says that the central bank will continue with its 'neutral' stance on monetary policy. In its October policy meeting, the MPC unanimously decided to change the stance to 'neutral' while remaining unambiguously focused on a durable alignment of inflation with the target while supporting growth.

"Since the last policy, inflation has been on the upside, while there has been a moderation in growth. Accordingly, the MPC adopted a prudent and cautious approach during 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. Our endeavour in the RBI has always been to implement timely and carefully calibrated measures to derive maximum impact. This will continue to be the guiding principle for all future actions also," Mr Das says.

Announcing the decision of the MPC after its three-day deliberations, the RBI governor says, "The MPC decided by a majority of 4:2 to keep the policy repo rate unchanged at 6.5%. The MPC also decided to continue with the neutral monetary policy stance and remain unambiguously focused on a durable alignment of inflation with the target while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth."  

Headline CPI inflation surged above the upper tolerance level to 6.2% in October from 5.5% in September and sub-4.0% prints in July-August, propelled by a sharp pickup in food inflation and an uptick in core (CPI excluding food and fuel) inflation.

Mr Das says high inflation reduces the purchasing power of both rural and urban consumers and may adversely impact private consumption. "The MPC emphasised that strong foundations for high growth can be secured only with durable price stability."

RBI says that real gross domestic product (GDP) registered a lower-than-expected growth of 5.4% in the second quarter (Q2) of FY24-25 as private consumption and investment decelerated, even while government spending recovered from a contraction in the previous quarter. On the supply side, the growth in gross value added (GVA) during Q2 was aided by resilient services and improving the agriculture sector, but weakness in industrial activity—manufacturing, electricity and mining - tempered overall growth.

Looking ahead, the central bank says robust kharif foodgrain production and good rabi prospects, coupled with an expected pickup in industrial activity and sustained buoyancy in services, augur well for private consumption. "Investment activity is expected to pick up. Resilient world trade prospects should provide support to external demand and exports. Headwinds from geo-political uncertainties, volatility in international commodity prices, and geo-economic fragmentation continue to pose risks to the outlook."

"Taking all these factors into consideration, real GDP growth for FY24-25 is projected at 6.6% with Q3 at 6.8% and Q4 at 7.2%. Real GDP growth for Q1:FY25-26 is projected at 6.9% and Q2 at 7.3%," RBI says.

Here are the additional measures announced by the RBI governor...

Expanding the Reach of FX-Retail Platform through Linkages with Bharat Connect
The FX-Retail platform, which was launched in 2019, is now proposed to be linked with the Bharat Connect platform of NPCI. This would enable users to transact on the FX-Retail platform through mobile apps of banks and non-bank payment system-providers. This will expand the reach of FX-Retail platform, enhance user experience and promote fairness and transparency in pricing with adequate safeguards.

Introduction of the Secured Overnight Rupee Rate (SORR) - a Benchmark Based on the Secured Money Markets
With a view to further develop the interest rate derivatives market in India and improve the credibility of interest rate benchmarks, the RBI proposes to introduce a new benchmark - the secured overnight rupee rate (SORR) - based on all secured money market transactions - overnight market repo as well as TREPS.

'Connect 2 Regulate' - An Initiative for Open Regulation
As part of the RBI's consultative approach in framing regulations, a new programme, namely, 'Connect 2 Regulate' will be launched under the ongoing RBI@90 commemorative events. A dedicated section in the RBI's website will be made available for stakeholders to share their ideas and inputs on specific topics.

Introduction of Podcast Facility as an Additional Medium of Communication
Over the years, the RBI has expanded its communication toolkit and techniques to enhance transparency and better connect with the people. In continuance of this endeavour, the RBI proposes to add 'podcasts' to its communication toolkit for wider dissemination of information.

Collateral-free Agriculture Loan - Enhancement of Limit
The limit for collateral-free agriculture loans was last revised in 2019. Taking into account the rise in agricultural input costs and overall inflation, it has been decided to increase the limit for collateral-free agriculture loans from Rs1.6 lakh to Rs2 lakh per borrower. This will further enhance credit availability for small and marginal farmers.

Pre-sanctioned Credit Lines through UPI - Extending the Scope to Small Finance Banks
Credit line on UPI was launched in September 2023 and was made available through scheduled commercial banks (SCBs). It has now been decided to permit small finance banks also to extend pre-sanctioned credit lines through the UPI. This will further deepen financial inclusion and enhance formal credit, particularly for 'new to credit' customers.

Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector - Setting up of a Committee
The financial sector landscape is witnessing rapid transformation, enabled by technologies such as artificial intelligence (AI), tokenisation, and cloud computing. In order to harness the benefits of these technologies while addressing the associated risks such as algorithmic bias, explainability and data privacy, a committee comprising experts from diverse fields will be set up to recommend a framework for responsible and ethical enablement of AI (FREE-AI) in the financial sector.

AI Solutions To Identify Mule Bank Accounts - MuleHunter.AI
As part of the RBI's continued efforts to prevent and mitigate digital fraud, an innovative AI / ML-based model, 'MuleHunter.AI', has been developed by the RBI Innovation Hub (RBIH), Bengaluru. This will help the banks to deal with the issue of mule bank accounts expeditiously and reduce digital fraud.

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