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RBI Maintains Key Interest Rate While Easing Cash Reserve Ratio

MUMBAI (Reuters) – The Reserve Bank of India (RBI) has opted to keep its primary interest rate steady, opting instead to reduce the cash reserve ratio (CRR) that banks must maintain. This decision aims to ease monetary conditions amid a slowdown in economic growth.

According to the latest figures, India’s GDP growth rate has decreased to 5.4% for the July-September quarter, marking the lowest growth in the last seven quarters. This slowdown is compounded by rising inflationary pressures and a weakening rupee, which constrains the RBI’s policy options.

The central bank has implemented a 50 basis point reduction in the CRR, bringing it down to 4%. This adjustment will be implemented in two phases, on December 14 and December 28, and is expected to inject 1.16 trillion rupees (approximately $13.72 billion) into the banking system, thereby lowering market interest rates.

During this latest meeting of the Monetary Policy Committee (MPC), the repo rate was held steady at 6.50% for the eleventh consecutive time. A majority of the committee, comprising three RBI members and three external experts, voted in favor of maintaining the current rate.

RBI Governor Shaktikanta Das emphasized the importance of price stability for the public, as it directly affects consumer purchasing power. He asserted that maintaining “durable” price stability is essential for fostering sustainable economic growth. Das also indicated that should the current growth slowdown persist, additional policy support might be necessary.

Despite recent fluctuations in growth and inflation figures, Das described the overall economic conditions as balanced and characterized current growth as resilient. Following the announcement of the CRR cut, India’s benchmark yield rose by 4 basis points to 6.7207%, while the rupee slightly weakened to 84.6725 per U.S. dollar from 84.6600. Stock market indexes also regained some ground after a brief decline in response to the interest rate decision.

Furthermore, India’s annual retail inflation climbed to 6.21% in October, surpassing the RBI’s tolerance threshold for the first time in over a year. In light of this, the central bank has revised its inflation forecast for the current financial year, increasing it to 4.8% from the previous estimate of 4.5%.

The RBI acknowledged that the GDP slowdown experienced its lowest point in the July-September quarter but noted a rebound in the months following, propelled by strong festival spending and favorable agricultural output due to good monsoon rains. Additionally, the central bank has adjusted its growth projection for the fiscal year ending in March 2025, lowering it to 6.6% from an earlier estimate of 7.2%.

($1 = 84.5500 Indian rupees)

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