Virendra Pandit
New Delhi: The Reserve Bank of India (RBI) on Friday retained its key interest rate—the repo rate—unchanged at 6.5 percent but lowered the growth forecast for FY25 from 7.2 percent earlier to 6.6 percent, aiming to balance inflation control with economic growth.
The central bank also cut the cash reserve ratio (CRR), which banks must hold in liquid cash with the RBI as a reserve, by 50 basis points (bps), from 4.5 percent to 4 percent, effectively easing monetary conditions as economic growth slows.
The RBI’s six-member Monetary Policy Committee (MPC), at its bimonthly meeting, continued with a “neutral” stance keeping the repo rate at 6.5 percent for the eleventh consecutive review. It revised the Consumer Price Inflation (CPI) forecast from 4.5 percent earlier to 4.8 percent now for FY25.
“To ease the potential liquidity stress, it has now been decided to reduce the cash reserve ratio to 4 percent of net demand and time liabilities i.e. net demand and time liabilities (NDTL), and this will be done in two equal tranches of 25 basis points each, effective the fortnight beginning December 14 and December 28,” RBI Governor Shaktikanta Das said.
After increasing the repo rate by 250 basis points (bps) to 6.5 percent between May 2022 and February 2023, the MPC has kept the repo rate unchanged. It changed its stance to neutral in October from the withdrawal of accommodation, the media reported.
“High inflation reduces the disposable income in the hands of consumers and dents private consumption which negatively impacts the real GDP growth. The increasing incidence of adverse weather events, heightened geopolitical uncertainties and financial market volatility pose upside risks to inflation,” he said.
The MPC believes that only with durable price stability can strong foundations be secured for high growth, Das said, adding that the panel stayed committed to restoring the inflation growth balance in the overall interest of the economy.
“Accordingly, the MPC decided to keep the repo rate unchanged at 6.5 percent in this meeting and also to continue with the neutral stance of monetary policy as it provides flexibility to monitor and assess the outlook on inflation and growth appropriately.”
Asked why the RBI’s growth estimate for the second quarter dropped from 7 percent to 5.4 percent, MPC member Michael Debabrata Patra explained that the growth challenges stemmed from issues on both the demand and supply sides.
On the demand side, the main problem was weak investment, driven by a slump in sales growth. On the supply side, manufacturing remains the critical issue, with inflation dampening urban consumer spending, leading to reduced sales and investments.
“These two factors are intertwined,” Patra said, adding that the slowdown in manufacturing was muted with little impact on inflation.
Das expressed optimism about the second half of the FY25, citing an expected recovery compared to the first half, which was affected by factors such as the monsoon, Lok Sabha elections, and subdued government expenditure. He highlighted challenges in sectors like mining, electricity, and manufacturing during the second quarter but reiterated a positive outlook for the months ahead.