RBI maintains repo rate at 6.5%, announces gradual reduction in Cash Reserve Ratio

RBI cuts cash reserve ratio by 50 bps to 4% to address liquidity woes

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), led by Governor Shaktikanta Das, has decided to keep the repo rate steady at 6.5%. This marks the continuation of an unchanged policy stance since February 2023. The decision followed a 4-2 vote by the MPC after evaluating the current macroeconomic conditions.

Key policy decisions

• Repo Rate: The repo rate, the interest rate at which the RBI lends money to banks for short-term needs, remains at 6.5%.
• Cash Reserve Ratio (CRR): The CRR, the percentage of banks’ total deposits that must be held in cash with the RBI, will be reduced in two phases. A 25-basis-point reduction will take effect on December 14, followed by another 25-basis-point cut on December 28.

Context and policy stance

In its October policy review, the MPC had shifted its stance from “withdrawal of accommodation” to “neutral,” indicating a more balanced approach to monetary management. The CRR cut is seen as a move to increase liquidity in the banking system, aligning with this neutral stance.

Inflation outlook and projections

The RBI is tasked with keeping Consumer Price Index (CPI) inflation within a target range of 2-6%. The current repo rate and CRR decisions aim to balance inflation control with economic growth.

• The RBI projects CPI inflation at 4.5% for FY25.
• However, a recent spike in inflation to 6.2% in October may prompt an upward revision to 4.8%, according to analysts.

Banking and monetary instruments

In addition to the repo rate, the RBI employs tools like the reverse repo rate (the rate at which it borrows money from banks), CRR, and Statutory Liquidity Ratio (SLR) to manage liquidity and control inflation. The SLR is the portion of deposits that banks must maintain in the form of cash, gold, or government-approved securities.

Market and economic implications

The unchanged repo rate signals stability in borrowing costs for banks and businesses, while the phased CRR reduction aims to ease liquidity pressures. These measures reflect the central bank’s commitment to fostering growth while addressing inflationary concerns.

The next monetary policy meeting will likely be closely watched for updates on inflation projections and any adjustments to the central bank’s strategy.

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