RBI keeps repo rate unchanged, cuts banks' CRR and lowers GDP forecast

Monetary Policy Committee keeps repo rate unchanged at 6.50% for the eleventh consecutive review

The Reserve Bank of India (RBI) kept its key interest rate unchanged on Friday, but lowered the economic growth forecast to 6.6 per cent for FY25 from the earlier projection of 7.2 per cent. It cut the cash reserve ratio (CRR) that banks are required to hold, effectively easing monetary conditions as economic growth slows.

 

The six-member monetary policy committee (MPC) continued with a “neutral” stance as it kept the repo rate at 6.50 per cent for the eleventh consecutive review. The CRR will be reduced to 4 per cent from 4.5 per cent.

 

“To ease the potential liquidity stress, it has now been decided to reduce the cash reserve ratio -- that is to reduce the CRR of all banks to 4 per cent of net demand and time liabilities i.e. net demand and time liabilities (NDTL) and this will be done in two equal tranches of 25 basis points each with effect from the fortnight beginning December 14 and December 28,” said RBI Governor Shaktikanta Das.

 

The CRR is the percentage of a bank's total deposits that it is required to maintain in liquid cash with the RBI as a reserve.  Also Read: Repo rate unchanged: Have a look at car loan interest rate by various banks

 

After increasing the repo rate by 250 basis points (bps) to 6.5 per cent between May 2022 and February 2023, the MPC has kept the repo rate unchanged. The MPC had changed the stance to neutral in October from withdrawal of accommodation.

 

“High inflation reduces the disposable income in the hands of consumers and dents private consumption which negatively impacts the real GDP growth.  The increasing incidence of adverse weather events, heightened geopolitical uncertainties and financial market volatility pose upside risks to inflation,” said Das in his statement.

 

The MPC believes that only with durable price stability can strong foundations be secured for high growth, Das said, adding that the committee remains committed to restoring the inflation growth balance in the overall interest of the economy.

 

“Accordingly, the MPC decided to keep the policy report unchanged at 6.5 per cent in this meeting and also to continue with the neutral stance of monetary policy as it provides flexibility to monitor and assess the outlook on inflation and growth appropriately.”

 

The RBI revised the growth forecast for the current financial year lower to 6.6 per cent, from the previous estimate of 7.2 per cent. The central bank also revised the inflation forecast upward to 4.8 per cent, against the earlier estimate of 4.5 per cent.