RBI Monetary Policy: Repo Rate Unchanged at 6.5%
After evaluating the current and emerging macroeconomic landscape, the Monetary Policy Committee (MPC) on 6 December 2024 decided to maintain the policy repo rate under the Liquidity Adjustment Facility (LAF) at 6.50%. As a result, the Standing Deposit Facility (SDF) rate remains at 6.25%, and the Marginal Standing Facility (MSF) rate and the Bank Rate continue at 6.75%.
The MPC resolved to sustain a neutral monetary policy stance, focusing firmly on achieving a durable alignment of inflation with its target while supporting economic growth. These decisions are aligned with the medium-term objective of maintaining Consumer Price Index (CPI) inflation at 4%, within a tolerance band of +/- 2%, alongside fostering economic growth.
Assessment of Domestic Economic Conditions
Domestically, real GDP growth in Q2 of 2024-25 slowed to 5.4%, lower than anticipated, primarily due to a deceleration in private consumption and investment, although government spending rebounded from the previous quarter’s contraction. On the supply side, gross value added (GVA) growth in Q2 was driven by resilient services and an improving agricultural sector. However, subdued industrial performance in manufacturing, electricity, and mining tempered overall growth.
Looking ahead, robust kharif foodgrain production, favorable rabi crop prospects, an anticipated recovery in industrial activity, and sustained strength in the services sector are expected to bolster private consumption. Investment activity is also projected to gain momentum. Global trade resilience is likely to support external demand and exports. However, challenges such as geopolitical uncertainties, volatile international commodity prices, and economic fragmentation remain risks to the outlook. Considering these factors, real GDP growth for 2024-25 is estimated at 6.6%, with projections of 6.8% in Q3 and 7.2% in Q4. For Q1 and Q2 of 2025-26, growth is forecasted at 6.9% and 7.3%, respectively, with risks being evenly balanced.
Inflation Outlook
The MPC highlighted that headline CPI inflation surged to 6.2% in October from 5.5% in September and sub-4% levels in July and August, driven by a sharp rise in food inflation and an increase in core inflation (excluding food and fuel). Considering these dynamics, CPI inflation for 2024-25 is projected at 4.8%, with estimates of 5.7% in Q3 and 4.5% in Q4. For Q1 and Q2 of 2025-26, CPI inflation is projected at 4.6% and 4.0%, respectively, with risks remaining balanced.
Policy Considerations and Risks
The MPC observed that recent developments in inflation and growth outcomes have been less favorable since the October policy review. However, economic activity is expected to improve, supported by rising business and consumer confidence, as indicated in Reserve Bank surveys. The recent surge in inflation underscores the risks posed by overlapping shocks to the inflation trajectory and expectations. Geopolitical uncertainties and financial market volatility further amplify inflationary risks. Elevated inflation diminishes the purchasing power of both rural and urban consumers, potentially dampening private consumption.
The MPC underscored the importance of price stability as a foundation for sustainable high economic growth. It reaffirmed its commitment to balancing inflation and growth to safeguard the overall economic interests.
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