The Reserve Bank of India (RBI) announced its fifth monetary policy review for FY25 on December 6. As widely expected, the Monetary Policy Committee (MPC), led by RBI Governor Shaktikanta Das, has decided to keep the repo rate steady at 6.5%. The Standing Deposit Facility (SDF) rate remains unchanged at 6.25%, while the Marginal Standing Facility (MSF) rate and the Bank Rate are maintained at 6.75%.
Key Highlights from the Announcement:
- Repo Rate: Unchanged at 6.5%
- SDF Rate: Remains at 6.25%
- MSF and Bank Rate: Retained at 6.75%
The RBI has retained its neutral policy stance to provide flexibility in tackling inflation and supporting growth. The decision reflects a balanced approach amidst volatile inflation trends and concerns over slowing economic activity.
CRR Decision Pending
While the repo rate remains unchanged, market participants are eagerly awaiting any announcements on the Cash Reserve Ratio (CRR). A potential reduction in CRR could provide the banking system with additional liquidity, boosting credit availability and stimulating economic growth.
In its October review, the MPC had maintained the repo rate but shifted its stance to ‘neutral’ from ‘withdrawal of accommodation.’ This adjustment signaled greater flexibility to address economic challenges. With inflation showing signs of moderation but still posing risks, experts had anticipated a focus on liquidity measures rather than changes to the key policy rate.
Understanding the Cash Reserve Ratio (CRR):
The CRR mandates commercial banks to hold a portion of their deposits as reserves with the RBI.
- Purpose: Ensures customer deposit security and controls liquidity in the market.
- Impact on Liquidity:
- High Inflation: A higher CRR reduces liquidity, controlling inflation.
- Economic Growth: A lower CRR boosts lending and economic activity.
