RBI December Monetary Policy-Implications

The cut in CRR by injecting additional liquidity of Rs 1.16 lakh crore will help banks increase credit growth and also improve their profitability by augmenting interest income whether it is deployed in credit or government securities.

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At the outset, the Governor stated that the policy announcements have been made taking into account both growth and inflation dynamics. Accordingly though the repo rate has been kept unchanged and the policy stance remains neutral a 50 bps CRR cut injects liquidity and minimizes the growth sacrifice the economy has to bear. Additional measures like the hike in collateral free limit for agri loans will also be growth supportive while the increase in overall ceiling rates for FCNR(B) deposits are intended to ensure stability in Rupee exchange rate.

Major takeaways

• In the fifth meeting of this fiscal, repo rate has been kept unchanged (6.5%) with a 4:2 majority, though some sections had expected a 25 bps cut keeping in view the growth sacrifice experienced in Q2 of FY25.

• The stance on liquidity has been unchanged at ‘neutral’ (same as the October policy) and to remain unambiguously focused on inflation aligning with the target while supporting growth.

• Real GDP growth forecast for FY25 has been revised downwards significantly from 7.2% to 6.6% and CPI inflation forecast revised upwards from 4.5% to 4.8%. The downward growth revision for the full fiscal reflects the impact of lower than expected GDP growth of 5.4% in Q2 due to subdued industrial activity and current geo political realities.

• The MPC stressed that a broad based cooling of inflation is in sight, due to comfortable kharif and rabi harvest expectations and higher reservoir levels. However, recent upsides in agri commodity prices and likelihood of adverse weather events warrant caution due to which full year inflation outlook has been revised upwards by 30 bps to 4.8%

Liquidity measures