The Reserve Bank of India (RBI) Governor Shaktikanta Das delivered the Monetary Policy Statement today, December 6, 2024, announcing that the repo rate remains steady at 6.5%. This marks the eleventh consecutive meeting where the Monetary Policy Committee (MPC) has opted to maintain the rate, underscoring its commitment to supporting economic stability amidst inflationary pressures.
Key Announcements by Governor Das:
- Repo Rate: Unchanged at 6.5%
- SDF Rate: Remains at 6.25%
- MSF and Bank Rate: Held at 6.75%
Governor Das emphasized that monetary policy decisions have a broad impact, shaping the lives of farmers, the middle class, corporates, and the overall economy. Reflecting on the past year’s challenges, including geopolitical tensions and financial market volatility, Das highlighted the critical role of central banks in maintaining stability.
Slowdown Bottomed Out
Das noted that the slowdown in economic activity appears to have bottomed out in Q2 FY25, suggesting that the economy is poised for recovery. However, tight liquidity conditions and persistent inflation remain key areas of concern.
Possible CRR Adjustment
The CRR, currently at 4.5%, could be adjusted to inject liquidity into the banking system. A 50 basis point (bps) cut would release approximately Rs 1.10 lakh crore to Rs 1.2 lakh crore, while a 25 bps reduction would add Rs 55,000 crore to Rs 60,000 crore of liquidity. This potential move would align with the RBI’s focus on easing liquidity constraints without compromising inflation control.
Liquidity Management Through CRR
The CRR serves as a percentage of a bank’s total deposits that must be held as reserves with the RBI, ensuring systemic stability. It is a crucial tool for:
- Managing Inflation: Higher CRR reduces liquidity, curbing excessive lending.
- Supporting Growth: Lowering CRR increases bank funds for lending, fostering economic activity.
While the MPC oversees policy stance and repo rate decisions, liquidity management remains the sole prerogative of the RBI.
Economic Challenges
Amid these decisions, the Indian economy faces significant hurdles:
- GDP Growth: Slowed to a seven-quarter low of 5.4% in Q2 FY25.
- Inflation: Persisting at elevated levels.
- Liquidity Constraints: Tight conditions in the banking sector.
Geopolitical and Domestic Considerations
Governor Das highlighted the broader challenges posed by geopolitical tensions and financial volatility, which have tested the resilience of central banks globally.
Outlook
The unchanged repo rate reflects a cautious approach, with the RBI opting to monitor growth and inflation trajectories. Any potential CRR cut would be a targeted measure to alleviate liquidity issues and stimulate economic growth, while maintaining the neutral stance of monetary policy.
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