In its bi-monthly meeting on December 6, 2024, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decided to keep the key policy repo rate unchanged at 6.50%, prioritizing inflation control and economic growth. This marks a continuation of the neutral monetary policy stance aimed at balancing inflation and growth amid evolving economic conditions.
Key Decisions
- Repo Rate: Maintained at 6.50%.
- Standing Deposit Facility (SDF): Held steady at 6.25%.
- Marginal Standing Facility (MSF) and Bank Rate: Remain unchanged at 6.75%.
The decision aligns with the RBI’s medium-term inflation target of 4% within a tolerance band of ±2%, while fostering sustainable growth.
Economic and Inflation Outlook
Global and Domestic Context:
The global economy remains stable but faces challenges such as geopolitical uncertainties and policy risks, leading to financial market volatility. Domestically, GDP growth for Q2 FY2024-25 slowed to 5.4%, impacted by weaker private consumption and investment despite strength in the services and agriculture sectors.
Looking ahead:
- Robust agricultural output and improving industrial activity are expected to drive private consumption.
- Global trade trends should provide a boost to exports.
- GDP growth for FY2024-25 is projected at 6.6%, with 6.8% in Q3 and 7.2% in Q4.
Inflation Trends:
Consumer Price Index (CPI) inflation rose to 6.2% in October, exceeding the RBI’s upper tolerance limit due to higher food and core inflation. While food prices are expected to ease in Q4 with improved harvests, risks from weather disruptions and global price volatility persist.
The RBI forecasts inflation at 4.8% for FY2024-25, with 5.7% in Q3 and 4.5% in Q4.
Rationale for the Decision
The MPC emphasized that controlling inflation is critical to maintaining consumer purchasing power and supporting long-term growth. While economic activity is expected to recover, the recent inflation surge highlights the risks of overlapping shocks, including geopolitical tensions and commodity price volatility.
By maintaining the repo rate, the RBI aims to stabilize inflation without hampering economic recovery.
Voting Outcome:
- Four members voted to maintain the repo rate at 6.50%.
- Two members proposed a 25 basis point cut.
- All members supported the neutral policy stance.
Next Steps
The minutes of the MPC meeting will be published on December 20, 2024, and the next meeting is scheduled for February 5–7, 2025.
Implications
The RBI’s decision underscores its cautious approach in navigating inflationary pressures and global uncertainties. The move is expected to provide flexibility in addressing future economic challenges while ensuring sustainable growth.
