RBI

RBI Monetary Policy December 2024- Key Rates and Measures

The Reserve Bank of India (RBI) plays a central role in driving the country’s economic growth, managing inflation, and ensuring financial stability. To assess the state of the economy and take necessary actions every year, the RBI holds and reviews various monetary policies.

The monetary policy of the RBI is guided by the decisions of the Monetary Policy Committee (MPC). It is responsible for setting key policy rates, including the repo rate, and implementing measures to support economic growth while also controlling inflation.

The latest MPC meeting was held on December, 6^th 2024. It has announced some key decisions and measures to address the evolving economic scenario. It is believed that this decision will have suggestions for businesses, consumers, and financial institutions affecting the overall economic health of India. 

In this article, we aim to break down the key aspects of the RBI’s monetary policy explaining its decisions, reasoning, and expected outcomes.  

Key Takeaways

Repo Rate Remains Unchanged at 6.5%

The rate set by the RBI for lending money to commercial banks for short-term borrowing is called the Repo Rate. When the repo rate goes up, banks charge higher interest rates on loans and deposits, which makes it more expensive for people and businesses to borrow money. When the repo rate is lower, borrowing becomes cheaper. In the MCP meeting of December 2024, the RBI decided to keep the repo rate at 6.5%. The rate has been the same since February 2023.

• Impact on Borrowing Costs: The repo rate has a direct influence on the borrowing costs for commercial banks. When the Reserve Bank of India (RBI) raises the repo rate, it becomes more expensive for banks to borrow money, which typically results in higher interest rates for consumers. Conversely, if the rate is lowered, borrowing becomes cheaper. By keeping the rate unchanged, the RBI signals its intention to maintain stability in borrowing costs, particularly for home loans, car loans, and business loans.Inflation Control: An increase in the repo rate helps control inflation by making borrowing more expensive, thereby reducing spending and demand in the economy. However, excessively high rates can stifle economic growth. By maintaining the rate at 6.5%, the RBI aims to strike a balance between managing inflation and supporting economic growth.Economic Stability: The decision to keep the repo rate at 6.5% suggests that the RBI is cautious about altering rates amidst ongoing inflation concerns while also recognizing the potential negative effects of overly tightening monetary policy. Maintaining stable rates provides predictability to the market and helps avoid shocks to the economy.

Monetary Policy Stance: Neutral

On 5 December 2024, the RBI retained its policy rate unchanged and maintained a neutral policy stance in line with its previous announcement. Given this, it means that the RBI has not tightened or loosened its monetary policy aggressively: it is an indicator to the public as being a stable economy from drastic policy to check either raising or lowering its interest rate.     

What Neutrality Signifies?

• Inflation Management: Inflation is the concern of the Reserve Bank of India, managing it as one of its chief objectives. It wants its head above the waters of keeping the rate more applicable but not higher to manage inflation-growth trade-offs.

• Economic Growth: Inflation is a concern, and supporting economic recovery is also one of the priorities of the Reserve Bank of India. The growth of the Indian economy will be slower than what has been expected, and the Reserve Bank of India would like to see that this should not floor the economy much.

Growth Projections Revised Downwards

The RBI also revised its Gross Domestic Product (GDP). Earlier the RBI had forecasted that India’s economy would grow by 7.2% in FY25. However, due to weaker performance than expected in the first half of the year, the forecast was revised down to 6.6%. 

Reasons for the Downgrade to 6.6%:

• Slower Industrial Growth: Industries like manufacturing, mining, and electricity generation crucial for economic growth are growing slower than expected.

• Global Economic Pressures: The global economy facing challenges has impacted India’s exports and industrial output.

• Agricultural Concerns: Agriculture is an essential part of India’s economy that recently has been under pressure, mainly due to unpredictable weather and further challenges.

Despite this downward revision, the RBI expects the economy to pick up in the second half of the year as the government has been spending on infrastructure and the agricultural recovery:

Growth Projections for FY25 if key sectors like agriculture and infrastructure show stronger performance:

• Q3 FY25: 6.8% (down from 7.4%)

• Q4 FY25: 7.2% (down from 7.4%)

Inflation Projections Revised Upwards

Inflation is a big focus for the RBI. Driven by higher prices of vegetables and other things that are crucial in people’s daily consumption, the RBI revised its inflation projections for FY25 upwards. As a result, the RBI revised its inflation forecast for FY25 to 4.8%.  

• Current Inflation: In October 2024, inflation surged to 6.2%, surpassing the RBI’s target range due to rising food prices, particularly vegetables.
• Revised Inflation Forecast: The RBI has raised its inflation forecast for FY25 to 4.8%, from 4.5%, due to persistent food price inflation, especially for vegetables.

Inflation Outlook for FY25:

• Q3 FY25: 5.7% (previously 4.8%)
• Q4 FY25: 4.5% (previously 4.2%)

Measures to Boost Liquidity and Credit

To boost the economy as a whole- particularly from slow growth, RBI has introduced a few measures in which banks get sufficient monetary resources for lending and credit to businesses and consumers.

• Cash Reserve Ratio Cut (CRR): The cash Reserve Ratio is a Percentage of (the Deposits) a bank that has to maintain with the Reserve Bank of India. Lower this portion of the cash reserve ratio by RBI, further amounts then will be available for the banks to lend.
• The Reserve Bank of India reduced the Cash Reserve Ratio from 4.5 to 4 and freed approximately ₹1.16 lakh crore huge money into the banking system. This is expected to add to the credit growth.
• Support to Small Farmers: Further extending this, the Reserve Bank had also raised the cap on collateral-free loans to small farmers, from the earlier to ₹2 lakh. They will, therefore, now qualify for access to credit to invest in equipment, seeds, and other resources, which will improve their productivity more.

Supporting Capital Inflows

To make India more attractive to international investors, the RBI raised the interest rate ceilings on FCNR(B) deposits (Foreign Currency Non-Resident deposits) by 150 bps.

This means foreign investors will get higher returns on their investments in India and help stabilize the currency by boosting foreign exchange reserves. Investment advisory support is required for fintech ventures to make the most out of the evolving economy in India.

Small Finance Banks (SFBs) and UPI Credit

Allowance of Small Finance Banks (SFBs) to offer pre-sanctioned credit lines through UPI (Unified Payments Interface) is one notable announcement made in December 2024. It is a significant move to improve financial inclusion and expand access to credit. Small Finance Banks can now offer instant credit lines through UPI.This is great for people in rural or underserved areas as they can now use UPI to access credit lines from SFBs.

AI and Digital Fraud Prevention

To counter the risk of online fraud, the RBI has introduced Mulehunter. AI. It aims to combat digital fraud, especially online banking and payment fraud in real-time.  RBI additionally plans to establish a committee and make sure AI technologies are used responsibly in the financial sector, ensuring transparency and fairness. Fraud risk management is crucial in current scenario.

Other Key Announcements

• Bharat Connect Integration: The RBI has linked its FX-Retail platform with Bharat Connect. This platform aims to make it easier for people to buy and sell foreign currency through UPI-based apps. 

• SORR (Secured Overnight Rupee Rate): The RBI has introduced a new benchmark interest rate called the SORR. It is based on secured money market transactions. This would improve transparency and efficiency in the financial markets.

To Wrap Up

The RBI’s December 2024 monetary policy is all about balance. It tries to balance managing inflation and supporting economic growth which is still facing challenges like high food prices and slower industrial growth. By keeping the repo rate unchanged at 6.5%, and introducing measures like the CRR cut and UPI credit lines RBI hopes to support economic growth.

RBI to support agricultural credit, attract foreign capital, and improve digital banking infrastructure is taking measures intending to foster long-term stability and growth. With an expectation of a recovery in the second half of FY25, the RBI will continue to keep an eye on inflation and growth. Hence, these policy decisions are a road map for businesses, consumers, and financial institutions as they key into the year ahead, steering through the intricate economic landscape of India. To get expert insights on circulars by RBI, SEBI, and IRDA, visit https://enterslice.com/.

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