The Reserve Bank of India (RBI) is expected to maintain its current interest rates during the monetary policy meeting scheduled for December 6, 2024. Economic experts anticipate a “status quo” on rates, with a consensus that any potential rate cut will likely occur in February 2025 instead.
Update (06-December-2024): As we predicated, the Monetary Policy Committee (MPC) decided to maintain the rep rates at 6.5% while slashed the cash reserve ratio (CRR) by 50 basis points to 4%.
If this is the case, it would mark the 11th consecutive meeting where the rate remains unchanged, as inflation in India (especially food prices) continues to pose a significant challenge, having recently breached the upper tolerance limit of 6%.
Analysts at ET suggest that while a rate cut is unlikely, the RBI may communicate its willingness to adjust rates in response to changing economic indicators. This indicates a proactive approach to future monetary policy adjustments.
Key Factors that Contribute to this outlook:
- Inflation Concerns: Although the average Consumer Price Index (CPI) has seen a slight decline to around 5%, sustained high inflation, particularly in food prices, poses a significant challenge. Experts warn that these supply shocks could spill over into broader inflationary pressures, complicating the RBI’s decision-making process.
- GDP Growth: The RBI faces a delicate trade-off between fostering economic growth and controlling inflation.
The Indian economy has shown signs of slowing, with GDP growth dropping to 5.4% in Q2 FY25, significantly below earlier projections. However, experts caution that immediate cuts may not be advisable given the prevailing inflationary environment. - Liquidity Management: While there is discussion about a possible cut in the Cash Reserve Ratio (CRR) to manage liquidity, the consensus remains that significant changes in interest rates are unlikely until February. This approach is seen as necessary to ensure any future rate cuts are effectively transmitted through financial markets.
Reports from India Today highlights RBI Governor Shaktikanta Das’s cautious stance on rate cuts, emphasizing the need to monitor inflation closely. The RBI is likely to prioritize stability over aggressive rate reductions.
General Consensus
The overall sentiment leading up to the December 2024 monetary policy meeting suggests, while there is a strong expectation for a rate cut in February 2025, the RBI is likely to hold interest rates steady during its December meeting due to ongoing inflationary pressures and the need for careful liquidity management.
My gut feeling says, RBI is likely to cut Cash Reserve Ratio (CRR) to manage liquidity without altering interest rates immediately.
Likely Impact of the Decision
- Continued Economic Pressure: Maintaining the current interest rate may prolong challenges for sectors reliant on borrowing, particularly in light of tepid growth figures. This could hinder recovery efforts and consumer spending if borrowing costs remain high.
- Liquidity Measures: Should the RBI opt for a CRR cut instead, it could provide banks with more liquidity to support lending without directly impacting inflationary pressures. This approach may help stimulate economic activity while keeping inflation in check.
- Market Reactions: The Indian stock market saw a 10% odd market correction amid constant selling from FIIs. Financial markets are closely monitoring the RBI’s stance, with expectations that a rate cut decision can boost the investor sentiments resulting in another bull run.
