Steady Rates with Focus on Evolving Dynamics

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) convened its fifth meeting for the fiscal year 2024-25 from 4th to 6th December amid concerns over rising headline inflation and lower gross domestic product growth. Announcing the outcome of the meet on 6th December ‘24, the RBI Governor said that the central bank has decided to keep the repo rates unchanged at 6.5%. The Standing Deposit Facility rate and the Marginal Standing Facility rate were left unchanged at 6.25% and 6.75%, respectively. This marks the final MPC meeting of Shaktikanta Das's current term, ending 10th December. This is the eleventh consecutive time that the RBI has decided to maintain status quo in its key interest rates. The MPC retained its neutral stance while remaining focused on a durable alignment of inflation to target while supporting growth. The RBI cut the Cash Reserve Ratio (CRR) by 50 basis points to 4%, which is the first CRR since March 2020.

The MPC meeting took place took place amid a challenging economic backdrop such as lower GDP growth, higher inflation and concerns over tight liquidity condition in the banking system. The governor emphasized the central bank’s commitment to maintaining a balance between inflation control and economic growth. He stated that the central bank's mandate is to ensure price stability, while also focusing on the goal of sustaining economic growth. The RBI stated in a statement that that strong foundations for high growth can be secured only with durable price stability. The governor noted that the last mile of disinflation turning out to be prolonged and arduous for economies. He cautioned that food inflation is expected to persist during Q3 but is anticipated to start easing from Q4 of FY25. The governor emphasized the importance of closely monitoring incoming data to confirm a sustained decline in inflation. He underscored that prudence and practicality necessitate maintaining sensitivity to the dynamically evolving economic landscape.

At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation with all its complexities and ramifications. A status quo in monetary policy in this meeting of the MPC has thus become appropriate and essential.

- RBI Governor Shaktikanta Das

Real GDP growth forecast for FY25 lowered to 6.6% from the earlier forecast of 7.2%.

CPI Inflation forecast for FY25 revised to 4.8% from the earlier projection of 4.5%.        

Observations on Economic Activity

• India is well-positioned to benefit from emerging global trends.
• Data shows that economic activity bounced back in July-September ‘24 quarter.
• Industrial activity is expected to normalize and recover from the lows of the previous quarter.
• Also, service exports sustained double-digit growth.
• Current account deficit will remain at a sustainable level in FY25.
• Q2 growth was significantly lower than anticipated. However, high-frequency indicators suggest that the slowdown in domestic activity may have reached its bottom during Q2, offering a potential sign of stabilization in economic trends.
• Weaknesses observed in the manufacturing sector. However, they are not widespread, indicating that the challenges were limited to specific areas rather than affecting the entire industry.
• Outlook for global economy clouded by protectionism which has the tendency to push inflation higher.

While the decision to maintain rates was expected, the governor's insights provided crucial guidance on the central bank's future policy direction. GDP growth for the quarter ending September ‘24 fell short of expectations at 5.4%. However, the governor remains optimistic, projecting a rebound to 6.8% in Q3 and 7.2% in Q4 of FY24-25, which could set the stage for a rate cut in the first half of next year.

Impact of the Repo Rate Hike

• In the run up to the meeting, the Street was divided on whether the rate-setting panel will hold steady on key interest rates or implement its first policy cut since February 2023. Benchmark indices BSE Sensex and Nifty 50 opened flat and was trading lower thereafter before the announcement.
• Following the announcement of the CRR reduction, the stock markets recovered slightly, with bank and financial stocks turning positive. the interest-sensitive realty sector also pared its losses. At 11 AM, the Sensex was 70 points higher, or 0.09% ahead at 81,836.37, while the Nifty 50 was at 24,720, higher by 12 points, or 0.05%.
• Bond markets had largely priced in a no-rate-change scenario with minor movements in the benchmark 10 yr G-Sec yield after the announcement was made.
• At Closing Bell: Indian equity indices ended marginally lower in the volatile session on 6th December. The Sensex was down 56.74 points or 0.07 percent at 81,709.12, and the Nifty was down 30.60 points or 0.12 percent at 24,677.80. On the sectoral front, except IT and media, all other indices ended in the green with auto, metal, FMCG, telecom, PSU Bank up 0.3-1 percent. BSE Midcap index was up 0.3 percent and small cap index was up 0.6 percent. The yield on India's benchmark 10-year government was at 6.85% and the Indian rupee ended higher at 84.69?per dollar on 6th December against 5th December’s close of 84.73.