MPC Keeps the Repo Rate unchanged for the 11th time
The MPC has decided to keep its interest rate unchanged for the Eleventh time (11th) in a row. On 9th December 2024, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announced its Monetary Policy Statement. Let us see the MPC statement now.
MPC Keeps the Repo Rate unchanged for the 11th Time
MPC, after evaluating the present and emerging macroeconomic situation, decided to keep the policy Repo Rate (i.e. policy interest rate) under the liquidity adjustment facility (LAF) unchanged at 6.50%.
This is the 11th consecutive time that the MPC has left the Key policy rate (i.e. Repo rate) unchanged over 22 months.
Consequently, the Standing Deposit Facility (SDF) rate remains at 6.25% and the Marginal Standing Facility remains at 6.75%.
The MPC decided to keep its stance ‘neutral’ while remaining focused on a long-term alignment of inflation with the target, which stimulates growth.
MPC on Gross Domestic Product (GDP)
The real gross domestic product (GDP) of India has registered a lower growth rate of 5.4% in Q2 2024–2025. This is due to a slowdown in private consumption and investment whereas government spending recovered from a contraction in the previous quarter.
The Gross Value Added (GVA) during Q2 was aided by the robust services and improving agriculture sector, however, the vulnerability in the industrial sector (i.e. Manufacturing, electricity and mining) hampered overall growth.
Moving forward robust kharif foodgrain production and good rabi prospects along with an estimated upsurge in industrial activity and continued resilience in services augur well for private consumption. Investment is also expected to pick up.
The improving global trade volumes are expected to boost external demand and exports. Geo-political uncertainties, volatility in International commodity prices, and geo-economic fragmentation continue to pose threats to the outlook.
Considering all these factors MPC estimates real GDP growth for 2024-25 at 6.6% with Q3 at 6.8%, and Q4 at 7.2%. Real GDP growth for Q1:2025-26 is projected at 6.9%, and Q2 at 7.3% (Chart 1). “The risks are evenly balanced” according to MPC.
MPC on Inflation
MPC stated that headline inflation surged above the tolerance level from 5.5% in September to 6.2% in October. This is a result of the upturn in food prices and Core inflation (CPI minus food & fuel).
Considering adverse weather events, a rise in international agricultural prices, estimating of good kharif and rabi production, MPC estimates, CPI inflation for 2024-25 at 4.8% with Q3 at 5.7%; and Q4 at 4.5%.
CPI inflation for Q1:2025-26 is estimated at 4.6%, and Q2 at 4.0% (Chart 2). It also stated that “the risks are evenly balanced”.
MPC Stance
The MPC reiterates that persistent price stability strengthens a sustained period of strong growth. The MPC remains steadfast in reinstating the balance between inflation and growth in the overall interest of the economy.
The MPC also decided to continue with its neutral stance as it provides flexibility to monitor the progress and outlook on disinflation as well as growth and to act aptly.
The MPC must therefore continue to monitor the changing inflation forecast. In light of these, the MPC decided to maintain the policy repo rate unchanged at 6.50% in this meeting.
Out of six (6) members of the MPC, four (4) members have voted to keep the policy repo rate unchanged and two (2) members voted to reduce the policy repo rate by 25 basis points.
All six (6) members voted for a change in stance from the withdrawal of accommodation to ‘neutral’ and to remain focused on the long-term alignment of inflation with the target, while supporting growth.
Introduction of the Secured Overnight Rupee Rate (SORR) – a Benchmark based on the Secured Money Markets
RBI has introduced a Secured Overnight Rupee Rate (SORR) – based on all secured money market transactions – overnight market repo as well as TREPS. This is to further develop the interest rate derivatives market in India and improve the credibility of interest rate benchmarks.
My Perspective and Takeaways
The key interest rate of RBI has remained unchanged for the Eleventh (11th) consecutive time. RBI has untouched the repo rate since February 2023. Food inflation remains a greater concern and a big hurdle for the descent of overall inflation.
The projection of GDP and Inflation has widely changed in comparison with October’s MPC statement. This is due to an unexpectedly shocking lower growth rate in Q2 of 2024-25.
Inflation is expected to fall in the third quarter – this is a really surprising estimate as food inflation is still at its peak. We need to wait and watch on these estimates.
Though RBI’s stance remains neutral, RBI’s stance shows that there is still a greater concern around the economy like increasing food inflation, volatile financial markets, and geopolitical tensions.
It has to be noted that RBI has cut the Cash Reserve Ratio (CRR) by 50 basis points from 4.5% to 4%. This is to boost liquidity in the financial system, The CRR cut is not a quite often phenomenon from RBI.
We do not expect a decrease in overall inflation in the next few quarters. This is worrisome for consumers and investors.
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