RBI MPC meeting highlights: Expect tight liquidity in remainder of FY25, says Governor Das on CRR cut

The Reserve Bank of India kept the key benchmark rate unchanged on December 6 due to still-high inflation despite India's economic growth slowed to a seven-quarter low of 5.4% last quarter. However, the cash reserve ratio was cut by 50 basis points to 4%, effective in two tranches on December 14 and December 28.

Four of six members of the Monetary Policy Committee (MPC) voted for a status quo in rates. The committee also retained its policy stance at "neutral".

Here are the highlights from RBI Governor Shaktikanta Das' post-RBI MPC meet outcome:

- Our effort is to follow the flexible targeting framework as provided in RBI Act

- Price stability is important to people because it impacts their purchasing power and ensuring "durable" price stability is critical to ensuring high growth in the economy. Policy support may be needed if the growth slowdown "lingers"

- After detailed assessment of macroeconomic outlook MPC decided by 4:2 to keep repo rate unchanged

- The Reserve Bank of India on Friday raised the interest rate ceiling for banks for foreign currency non-resident (FCNR-B) deposits, to increase capital inflows in the country

-GDP projection: FY25 GDP growth has been revised to 6.6% from 7.2%. Growth in real GDP in Q2 at 5.4% turned out to be much lower than anticipated. This decline in growth was led mainly by a substantial deceleration in industrial growth from 7.4% in Q1 to 2.1% in Q2 due to subdued performance of manufacturing companies, contraction in mining activity and lower electricity demand.

-Inflation projection: Food inflation pressures are likely to linger in the October-December quarter, easing only early next year as the impact of a good monsoon is seen on agricultural output, Das said. CPI inflation for 2024-25 is projected at 4.8%, with Q3 at 5.7%; and Q4 at 4.5%. CPI inflation for Q1FY26 is projected at 4.6%; and Q2 at 4%. The risks are evenly balanced.

-CRR slashed: The cash reserve ratio (CRR) has been reduced from 4.5% to 4%, to be done in two tranches of 25 bps each; CRR cut to help liquidity by Rs 1.16 lakh crore to the banking system. "What banks do with CRR money is their call. We expect tight liquidity in the remainder of the financial year," said Governor Das at post-RBI policy meet press conference.

-Current account deficit will remain at sustainable level in FY25

- On Indian economy: For now, the central bank sees economic growth as resilient, Das said. Not withstanding the recent aberrations in growth and inflation, domestic conditions are on a balanced path, he said.

-RBI imposes business restrictions on regulated entities only in cases where sufficient corrective action is not visible

-FX-Retail platform expansion: The FX-Retail platform, which was launched in 2019, is now proposed to be linked with the Bharat Connect platform of NPCI. This would enable users to transact on the FX-Retail platform through mobile apps of banks and non-bank payment system providers. This will expand the reach of FX-Retail platform, enhance user experience and promote fairness and transparency in pricing with adequate safeguards.

-The RBI proposes to introduced new benchmark Introduction of secured overnight rupee rate, which is based on all secured money market transaction i.,e, overnight market repo and treps

-On rupee depreciation: During 2024-25 (April-November), the Indian rupee (INR) depreciated by 1.3 per cent largely due to pressure from strengthening US Dollar and selling pressure by foreign portfolio investors in October and November. Nevertheless, both the depreciation of the INR and its volatility was less as compared to its emerging market economies peers, reflecting India’s strong macroeconomic fundamentals and improvement in external sector outlook.

-Financial parameters of banks, NBFCs continue to be strong; health of financial sector is at its best

- RBI to set up committee of experts to suggest framework for responsible, ethical use of AI

- Collateral-free Agriculture Loan: Collateral free loan in agriculture sector increased from Rs 1.6 lakh per borrower to Rs 2 lakh. "The limit for collateral-free agriculture loans was last revised in 2019. Taking into account the rise in agricultural input costs and overall inflation, it has been decided to increase the limit for collateral-free agriculture loans from Rs 1.6 lakh to Rs 2 lakh per
borrower. This will further enhance credit availability for small and marginal farmers," said Das.

-"We do not make policy decision or liquidity decisions keeping in mind balance sheet requirements of banks. Our policies are governed by growth inflation dynamics, overall stability of economy," said Das.

Expert Speak:

"We anticipate rate cuts at the end of FY25 or at the beginning of FY26 since inflation has intensified. Typically, NBFCs are better positioned to benefit from cuts in rates as credit growth will improve followed by banks. Also, credit-sensitive sectors like auto and real estate will see higher demand," said Anil Rego- Founder and Fund Manager at Right Horizons PMS.

"Reduction in CRR is a positive and should impact the banks positively and ensure liquidity in the system. Barring some of the uncertainties that could evolve in macros, we believe that the financial system is stable, RBI decisions are proactive and responsive and our economy is in a comfortable zone. The markets should continue to benefit over the near term," said Divam Sharma, Founder and Fund Manager at Green Portfolio.

"The projected GDP growth of 6.6% for FY25 signals underlying strength in the economy, supported by a recovery in high-frequency indicators and sustained demand across key sectors. From an investment perspective, the RBI’s neutral stance provides much-needed stability. For fund managers, this is an opportune moment to focus on sectors poised to benefit from sustained domestic demand and India’s long-term growth trajectory. While global headwinds remain a concern, India’s strong macroeconomic fundamentals and policy continuity offer a robust foundation for investors to navigate the current landscape with confidence," said Anirudh Garg- Partner and Fund Manager at Invasset PMS.