RBI MPC Meeting December 2024-RBI Repo Rate Unchanged At 6.5%, Maintains ‘Neutral’ Stance, Reduces CRR To 4%

The six-member Monetary Policy Committee (MPC), led by Reserve Bank Governor Shaktikanta Das, commenced its bi-monthly policy deliberations on Wednesday.
This marks Das’s final MPC meeting as chairperson, with his tenure concluding on December 10.

RBI governor Shaktikanta Das on Friday announced that the Monetary Policy Committee has decided to keep the repo rate unchanged at 6.5% with a 4:2 majority. RBI governor said that while the MPC has taken note of the GDP growth data for Q2 of FY2025, and will revise downwards the growth outlook for the financial year accordingly, inflation remains the key focus area. The real GDP growth forecast for FY25 was revised downward substantially from 7.2% earlier to 6.6%.

“High inflation reduces the disposable income in the hands of consumers and dense 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. The MPC believes that only with durable price stability can strong foundations be secured for high growth. The MPC remains committed to restoring the inflation growth balance,” he said.

‘Timing of decisions important’

“As a central bank, our job is that of an anchor of stability and confidence, which would ensure that the economy achieves sustained high growth. Since the last policy, that is since the October policy, inflation has been on the upside, while there has been a moderation in growth. Accordingly, the MPC has adopted a prudent and cautious approach in this meeting to wait for better visibility on the growth and inflation outlook.

At such a critical juncture, prudence, practicality and timing of decisions become even more critical. Our endeavor in the Reserve Bank has always been to implement timely and carefully calibrated measures to derive the maximum impact. This will continue to be the guiding principle for all future actions,” RBI governor Shaktikanta Das said.

As part of the Reserve Bank’s continued efforts to prevent and mitigate digital frauds, an innovative AI based model, namely the mulehunter.ai has been developed by the Reserve Bank innovation hub at Bengaluru. This will help the banks to deal with the issue of mule accounts expeditiously and reduce digital frauds,” said RBI governor Shaktikanta Das.

Major change in collateral free agricultural loans

The limit for collateral free agricultural loans was last revised in 2019. Taking into account the rise in agricultural input costs and overall inflation.

It has been decided to increase the limit for collateral free agriculture loans from Rs 1.6 lakh crore per borrower to Rs 2 lakh per borrower. This will further enhance credit availability for small and marginal farmers.

CRR cut to 4%

“Even as liquidity in the banking system remains adequate, system liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows to ease the potential liquidity stress, it has now been decided to reduce the Cash Reserve Ratio.

CRR of all banks will be reduced to 4% of net demand and time liabilities that is NDTL. And this will be done in two tranches, two equal tranches of 25 basis points, each with effect from the fortnight beginning December 14 and December 28.

The decision to cut CRR by 50 bps will free up Rs 1.16 lakh crore to the banking system, augmenting the lendable resources of banks.

This will restore the CRR to 4% of NDTL, which was, in fact, the prevailing which was the prevailing rate before commencement of the policy tightening cycle in April 2022,” said RBI governor Shaktikanta Das.

Following are the highlights of the bi-monthly monetary policy announced by the Reserve Bank of India on Friday:

Repo rate kept unchanged at 6.5%
Status quo on repo rate since February 2023
Monetary policy stance continues to be in ‘neutral
GDP growth projection for FY25 reduced to 6.6% from 7.2%
GDP growth forecast for Q1 FY25 at 6.9%; Q2 at 7.3%
Inflation projection for FY25 is forecasted to be at 4.8%
Inflation projection for Q3 at 5.7%; Q4 at 4.5%; Q1 FY26 at 4.6% and Q2 at 4%
Mulehunter.AI is introduced to combat digital fraud
UPI Credit option is now open to Small Finance Banks

Learn About Repo Rate and CRR

The Cash Reserve Ratio (CRR) is the percentage of a commercial bank’s total deposits that must be maintained as reserves with the central bank (like the Reserve Bank of India, RBI). This regulation ensures liquidity in the banking system and serves as a tool for controlling inflation and deflation.

Key Features:

Purpose:
- Regulates the flow of money in the economy.
- Ensures banks have a safety buffer.
Effect on Economy:
- High CRR: Reduces the amount banks can lend, which helps control inflation.
- Low CRR: Increases the lending capacity of banks, which can stimulate economic growth.
Impact on Banks:
- Funds kept as CRR do not earn interest, affecting bank profitability.

Repo Rate

The Repo Rate is the rate at which the central bank lends money to commercial banks, typically for short-term needs. It is a critical monetary policy tool used to control liquidity, inflation, and economic stability.

Key Features:

Purpose:
- Provides short-term funding to banks.
- Influences interest rates in the broader economy.
Effect on Economy:
- High Repo Rate: Increases borrowing costs, discourages loans, and helps curb inflation.
- Low Repo Rate: Reduces borrowing costs, encourages loans, and can boost economic growth.
Impact on Consumers:
- Changes in the repo rate directly influence interest rates on loans and deposits.

Comparison of CRR and Repo Rate:

Feature	CRR	Repo Rate
Definition	Percentage of deposits banks keep with the central bank.	Rate at which the central bank lends to commercial banks.
Nature	Regulatory requirement.	Lending mechanism.
Impact on Banks	Reduces available funds for lending.	Affects borrowing costs for banks.
Objective	Control liquidity in the system.	Manage short-term liquidity and economic activity.
Interest Income	No interest is earned.	Banks pay interest to the central bank.

Understanding both CRR and the Repo Rate helps gauge the central bank’s strategies for managing inflation, liquidity, and overall economic stability.