The Reserve Bank of India (RBI) announced its latest monetary policy decisions on December 6, 2024, amid a backdrop of heightened economic challenges and geopolitical uncertainties. The Monetary Policy Committee (MPC) opted to maintain the repo rate at 6.5%, signaling a cautious stance in balancing inflation control and growth support.
This policy decision comes against the backdrop of evolving macroeconomic dynamics, prompting a more nuanced approach to monetary adjustments.
Key Highlights of the RBI Monetary Policy
Rate Action
- Repo Rate: Unchanged at 6.5%.
- Voting Pattern: The decision to maintain rates was passed by a 4-2 vote, indicating a shift from the earlier 5-1 voting pattern in October 2024. Two external members, Dr. Nagesh Kumar and Prof. Ram Singh, advocated for a 25 basis points (bps) rate cut, reflecting their concerns about slowing growth.
- Policy Stance: All six MPC members unanimously agreed to retain the “neutral” stance, offering flexibility to respond to future economic data.
Assessment of Policy Action
The policy decision was largely in line with market expectations, considering the following economic and geopolitical factors:
1. Inflationary Pressures
- Inflation surged in October 2024 due to an unexpected spike in food prices.
- CPI inflation for FY25 was revised upwards from 4.5% to 4.8%.
- Despite anticipated moderation in food prices, adverse weather conditions and rising international agricultural commodity prices present upside risks to inflation.
2. Geopolitical Risks
- The new U.S. administration’s strong mandate has led to global trade uncertainties, increasing foreign exchange (FX) and interest rate volatility.
- Market expectations for Federal Reserve rate cuts have softened, leading to significant foreign portfolio investment (FPI) outflows. India’s FX reserves dropped to $656 billion from $701 billion in October 2024.
3. Growth Slowdown
- Q2 FY25 GDP growth fell to 5.4%, below the RBI’s 7% estimate.
- High-frequency indicators such as tax collections and auto sales signal a cooling economy, further dampening growth projections.
Inflation and Growth Forecasts
| CPI Inflation (%) | Aug 2024 | Oct 2024 | Dec 2024 |
|---|---|---|---|
| Q3 FY25 | 4.7 | 4.8 | 5.7 |
| Q4 FY25 | 4.3 | 4.2 | 4.5 |
| FY25 | 4.5 | 4.5 | 4.8 |
| GDP Growth (%) | Aug 2024 | Oct 2024 | Dec 2024 |
|---|---|---|---|
| Q3 FY25 | 7.3 | 7.4 | 6.8 |
| Q4 FY25 | 7.2 | 7.4 | 7.2 |
| FY25 | 7.2 | 7.2 | 6.6 |
The RBI expects inflation to moderate in FY26 due to a strong kharif harvest and favorable rabi crop conditions. Growth projections remain subdued, with the RBI attributing Q2’s disappointing performance to one-off manufacturing sector challenges.
Liquidity Management
To address liquidity pressures, the RBI cut the Cash Reserve Ratio (CRR) by 0.5% to 4%, effectively injecting durable liquidity into the system. This move aims to:
- Keep overnight rates aligned with the repo rate.
- Prevent a significant liquidity deficit by the next quarter.
- Support economic recovery and provide room for future rate cuts.
Additional measures such as variable rate reverse repos (VRRs), FX swaps, or bond purchases may be employed in Q4 FY25 if adverse FX flows persist.
Outlook for Monetary Policy and Bond Yields
Policy Rate Outlook
- The RBI is expected to initiate a rate-cut cycle in 2025, contingent on clearer signs of inflation moderation. Analysts predict rate cuts of 50–75 bps during this cycle.
Bond Market Outlook
- Intermediate-duration bonds (1-5 years) offer attractive yields, with potential for curve steepening as the rate cycle progresses.
- Investors with short-term horizons (6-12 months) may benefit from low-duration strategies, while those with longer horizons can consider moderate-duration investments.
Investment Strategies in the Current Environment
- Short-Term (6-12 Months):
- Allocate to low-duration or money market strategies for stable returns amidst short-term volatility.
- Long-Term (12+ Months):
- Consider moderate-duration categories to capitalize on attractive accruals and potential mark-to-market gains as rates decline.
Conclusion
The RBI’s cautious policy stance reflects its balancing act between controlling inflation and sustaining economic growth. While challenges persist, measures such as the CRR cut signal a commitment to liquidity infusion and growth support. Investors should remain vigilant of geopolitical risks but can leverage the current environment for strategic allocations in the bond market.
Disclaimer
This article is for informational purposes only and does not constitute financial advice. Please consult with a certified financial advisor before making investment decisions.
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