Trends & Tides – RBI Monetary Policy December 2024
The RBI Monetary Policy Committee (MPC) decided to maintain the repo rate at 6.5% in the December 2024 meeting, with the monetary policy stance also remaining unchanged. However, the RBI reduced the Cash Reserve Ratio (CRR) by 50 bps, injecting Rs 1.16 trillion of liquidity into the banking system to ease potential liquidity stress.
In the post-policy press conference, the Governor acknowledged that near-term inflation and growth outcomes in India have turned somewhat less favourable since the October policy. However, the Governor expressed optimism regarding the recovery in economic growth. The Governor also mentioned that headline inflation is likely to ease and realign with the target, but it is necessary to monitor incoming data to confirm the decline. Broadly, the policy adopted a ‘prudent and cautious’ approach, awaiting clearer visibility on the growth and inflation outlook.
The RBI revised FY25 CPI inflation projection to 4.8% YoY from 4.5% in the previous policy. Food inflation is expected to ease in Q4 due to seasonal correction in vegetable prices and kharif harvest arrivals. Good soil moisture and reservoir levels should support rabi production. However, adverse weather and rising international commodity prices pose risks to food inflation. Businesses anticipate sustained input cost pressures and faster growth in selling prices from Q4.
The RBI lowered FY25 GDP growth projection to 6.6% YoY from 7.2% in October 2024. Economic activity is expected to improve with rising business and consumer sentiment. Strong kharif foodgrain production and positive rabi prospects should support the rural sector. Anticipated growth in the industrial and service sectors should revive private consumption. However, geopolitical uncertainties, commodity price volatility, and geo-economic fragmentation remain risks to the outlook.
The inflation outlook, particularly for food, appears favourable, supported by healthy kharif production and promising prospects for the rabi season. We expect inflation to durably align with the 4% target by H2FY26. As the Governor aptly noted, monetary policy is forward-looking; therefore, we assign a high probability to a rate cut in the February 2025 policy.
