India RBI MPC Review – December 6, 2024

 The Reserve Bank of India (RBI) announced its monetary policy review on December 6, 2024, leaving the repo rate unchanged at 6.5%. However, it implemented non-conventional measures, including a phased 50 basis points (bps) reduction in the Cash Reserve Ratio (CRR) to 4.0% from 4.5%. This move is expected to inject INR 1.1 trillion ($13 billion) into the banking system, addressing liquidity concerns.

The RBI also adjusted its economic forecasts for FY25, lowering the GDP growth projection to 6.6% from the earlier estimate of 7.2%. Meanwhile, inflation forecasts for the same period were revised upward to 4.8% from 4.5%, raising fears of stagflation. Governor Shaktikanta Das acknowledged the potential need for policy interventions if growth challenges persist while emphasizing the importance of monitoring inflation trends through incoming data.

Market Reactions and Key Highlights:

• Indian Government Bonds (IGBs) displayed a marginally softer tone following the announcement, reflecting the market's expectations of the RBI’s measures.
• The Indian Rupee (INR) maintained a stable trajectory, with global factors expected to play a significant role in its near-term performance.
• Markets are now closely watching U.S. economic data and the forthcoming domestic inflation report for further direction.

Key Policy Updates:

1. Policy Rates:

   • Repo rate remains at 6.5%.
   • Marginal Standing Facility (MSF) and bank rates unchanged at 6.75%.
   • Policy stance remains neutral.

2. Economic Projections:

   • GDP Growth:
     • FY25: Revised to 6.6% from 7.2%.
     • Q3 FY25: Adjusted to 6.8% (previously 7.2%).
     • Q4 FY25: Revised to 7.2% (from 7.4%).
   • Inflation:
     • FY25 CPI inflation forecast increased to 4.8%.
     • FY26 inflation projections: 4.6% for Q1 and 4.0% for Q2.

3. CRR Reduction:

   • Implemented in two tranches of 25 bps each, reducing CRR to 4%.
   • Aimed at enhancing systemic liquidity and supporting economic recovery.

4. Introduction of New Benchmark:

   • RBI launched the Secured Overnight Rupee Rate (a benchmark based on secured money markets). Further details are awaited.

5. Foreign Exchange Management:

   • The central bank highlighted the judicious deployment of forex reserves to manage market volatility.

The policy underscores the RBI's focus on balancing growth and inflation risks in a challenging economic environment. Future decisions will likely hinge on inflationary trends and global economic developments.

For investors and market participants, the evolving macroeconomic landscape warrants vigilance as new data emerges.