The RBI sharply cut the GDP growth projection to 6.6 per cent from the earlier level of 7.2 per cent, while raising inflation target to 4.8 per cent from the previous projection of 4.5 per cent for the current fiscal.
Mumbai: Reducing cash reserve ratio(CRR) by 50 basis points to 4 per cent, the Reserve Bank of India on Friday decided to keep the policy rate unchanged for the 11th time in a row but sharply lowered the GDP growth forecast to 6.6 per cent for the current fiscal, as against earlier projection of 7.2 per cent.
The CRR is the proportion of deposits that banks need to set aside as cash. The cut will be in two tranches of 25 basis points each, kicking in on Dec. 14 and Dec 28. The reduction in CRR would free up Rs 1.16 trillion in the banking system.
However, the central bank decided to keep the repo rate (key lending rate) unchanged at 6.5 per cent for the 11th consecutive meeting, citing concerns over inflation and the uncertain growth outlook.
The RBI maintained the status quo on interest rate despite July-September quarter GDP growth falling to 7-quarter low of 5.4 per cent, as against its own projection of 7 per cent.
Announcing the fifth bi-monthly monetary policy for the current financial year, Shaktikant Das, governor, RBI said the Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 6.5 per cent while keeping policy stance unchanged at neutral.
The RBI sharply cut the GDP growth projection to 6.6 per cent from the earlier level of 7.2 per cent, while raising inflation target to 4.8 per cent from the previous projection of 4.5 per cent for the current fiscal.
The RBI has projected Inflation for FY25 is at 4.8 per cent . For Q3, it is expected to rise to 5.7 per cent, but is anticipated to decline to 4.5 per cent in Q4. For Q1 FY26, inflation is forecasted at 4.6 per cent, with a further dip to 4 per cent in Q2 FY26.
Revising the real GDP growth downside for FY25, the central bank has now projected it at 6.6 per cent. For Q3, the growth rate is expected to be 6.8 per cent, while Q4 is anticipated to rise to 7.2 per cent.
Looking ahead to Q1 FY26, the real GDP growth is forecasted at 6.9 per cent, with a further increase to 7.3 per cent in Q2 FY26.
Growth in real GDP in the second quarter of this year at 5.4 per cent turned out to be much lower than anticipated, said Das .
“This decline in growth was led by a substantial deceleration in industrial growth from 7.4% in the first quarter to 2.1% in the second quarter due to the subdued performance of manufacturing companies, contraction in mining activity and lower electricity demand,” he said.
Das stated that Q2 growth was significantly lower than anticipated. However, he noted that high-frequency indicators suggest that the slowdown in domestic activity may have reached its bottom during Q2, offering a potential sign of stabilisation in economic trends.
Das explained that high inflation impacts consumers by reducing their disposable income, which in turn affects spending and overall economic dynamics.
He emphasised the central bank’s commitment to maintaining a balance between inflation control and economic growth. Das stated that the central bank’s mandate is to ensure price stability, while also focusing on the goal of sustaining economic growth.
“Our effort is to follow the flexible inflation target,” said Das.
Das highlighted that the growing frequency of weather-related events, financial volatility, and geopolitical developments pose significant upside risks to inflation.
“The MPC’s decision to keep the repo rate unchanged was along expected lines, with the CPI inflation exceeding the MPC’s upper threshold of 6.0 per cent. However, the cut in the CRR by 50 bps would help support growth, after the downward revision in the forecast for FY2025,” said Aditi Nayar, Chief Economist at ICRA.
“If the CPI inflation retraces to below 5.0 per cent by the December 2024 print, the likelihood of a repo cut in February 2025 will rise sharply,” Nayar added.
Ashwani Dhanawat, executive director and chief investment officer, Shriram General Insurance Company, said the reduction in the CRR is a targeted response to address ongoing liquidity tightness, providing banks with additional funds to support credit growth and economic activity.
“`With inflation projections for FY25 revised to 4.8%, the committee’s neutral stance reflects a cautious approach in balancing persistent inflationary pressures with the need to foster sustainable growth. While challenges on the consumption and investment fronts remain, the policy adjustments underscore the RBI’s focus on maintaining economic stability while ensuring adequate liquidity in the system,” he said.
The RBI has decided to increase the collateral limit for agricultural loans from Rs 1.6 lakh crore per borrower to Rs 2 lakh crore, aiming to provide greater financial support and stability to farmers, while facilitating higher credit availability in the agricultural sector.