RBI Keeps Repo Rate Unchanged at 6.5% Amid High Inflation

07-12-2024

1. Monetary Policy Review by the RBI

On December 6, 2024, The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to keep the repo rate at 6.5%. This is the 11th time in a row that the RBI has not changed the repo rate.
The decision was made to control high inflation while considering the slowdown in the economy.

2. Reasons for Keeping Repo Rate Unchanged

Even though inflation is high, the RBI chose not to change the rate to keep prices stable, which is one of its main goals.
They want to bring inflation down to their 4% target.
Inflation in October 2024 was 6.2%, the highest in 14 months.
The GDP growth forecast for FY 2024-25 was revised down to 6.6% from 7.2%.
In the 2nd quarter of FY 2024-25 (July–September), growth slowed to 5.4%, much lower than the RBI's earlier prediction of 7%.

3. Inflation and Growth Outlook

Food inflation will continue to be a problem in the third quarter (Q3) of 2024-25, but is expected to ease in the 4th quarter (Q4) due to lower vegetable prices, new crops, and better harvests.
The RBI Governor, Shaktikanta Das, mentioned that inflation could rise because of bad weather, global political issues, and market fluctuations.

4. Cash Reserve Ratio (CRR) Cut

To help banks handle liquidity issues (lack of enough cash), the RBI decided to lower the Cash Reserve Ratio (CRR) for banks by 50 basis points to 4%.
This is the 1st time in four years that the CRR has been cut.
The cut will be done in two parts, 25 basis points each, starting from December 14, 2024, and December 28, 2024.
This change will provide ₹1.16 lakh crore in cash to the banking system.

5. Neutral Stance Maintained

The MPC agreed to keep a neutral stance, meaning they are focusing on long-term price stability and aligning inflation with the 4% target.
Despite concerns about slower growth, the RBI Governor said it’s important to keep inflation under control for future economic stability.

6. FCNR(B) Deposit Ceiling Increase

To attract more foreign money, the RBI raised the interest rate limits for FCNR(B) deposits (foreign currency deposits from non-residents).
1. For deposits with a maturity of 1 year to less than 3 years, the limit has been raised to ARR + 400 bps (up from ARR + 250 bps).
2. For deposits with 3 to 5 years maturity, the limit is now ARR + 500 bps (up from ARR + 350 bps).
These changes will remain until March 31, 2025.

What is Repo Rate (Repurchase Rate)?

The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends short-term money to commercial banks against government securities.
Purpose: It is a tool of monetary policy used by the RBI to control inflation and manage liquidity in the economy.
1. When inflation is high: The RBI increases the repo rate to make borrowing expensive, thus reducing the money supply in the economy.
2. When inflation is low or the economy needs a boost: The RBI reduces the repo rate, making borrowing cheaper, and thus increasing the money supply.
Impact: A change in the repo rate affects the interest rates that banks charge on loans and savings accounts, influencing economic activity.

What is CRR (Cash Reserve Ratio)?

The cash reserve ratio (CRR) is the percentage of a bank's total deposits that it must maintain as reserves with the RBI in the form of liquid cash.
Purpose: The CRR is used by the RBI to control the money supply in the economy. By changing the CRR, the RBI can influence the amount of money that banks can lend.
1. Higher CRR: The RBI increases the CRR to reduce the lending capacity of commercial banks, thereby tightening the money supply.
2. Lower CRR: The RBI decreases the CRR to allow banks to lend more, thus increasing the money supply.
Impact: A change in CRR affects the liquidity in the banking system and the availability of funds for loans.

What is FCNR(B) Deposit Ceiling?

FCNR(B) stands for Foreign Currency Non-Resident (Bank) Deposit, which is a type of fixed deposit account in foreign currency that can be opened by Non-Resident Indians (NRIs) with Indian banks.
Purpose: The FCNR(B) account allows NRIs to deposit funds in foreign currencies, avoiding exchange rate risks.
Deposit Ceiling: The deposit ceiling refers to the maximum amount that can be deposited by an individual under an FCNR(B) account.
Key Features:
1. Deposits are in foreign currency, and the account can be maintained in major currencies like USD, GBP, EUR, etc.
2. The interest earned on FCNR(B) deposits is tax-free in India.
3. Withdrawals from these accounts are subject to exchange rate fluctuations.

7. Conclusion

The main goal of the RBI is to control inflation while making sure the economy grows steadily. The RBI is being careful in making decisions, as it wants to better understand future trends in growth and inflation before making any more changes.

What is the Monetary Policy Committee (MPC)?

The MPC is a committee formed by the Central Government, led by the Governor of the Reserve Bank of India (RBI).
It was established under Section 45ZB of the RBI Act, 1934.
The first meeting of the MPC took place on October 3, 2016, in Mumbai.
Purpose:
1. The main objective of the MPC is to set the benchmark policy interest rate (repo rate) to control inflation within a specific target range (4+-2) %
Functions:
1. The committee determines the policy interest rate needed to achieve the inflation target.
2. It meets at least four times a year.
3. Every six months, the RBI publishes a Monetary Policy Report, explaining the sources and forecasts of inflation for the next 6-18 months.
Meeting Details:
1. Quorum: A minimum of 4 members must be present for the meeting to proceed.
2. Voting: Each member gets one vote.
3. In case of a tie, the Governor has a second or casting vote.
Composition:
1. Total Members: 6 members (including the Chairman)
  - 3 RBI officials
  - 3 external members nominated by the Government of India.
2. Governor of RBI serves as the Chairperson (ex-officio).
3. Term of Government Nominated Members: 4 years from the date of appointment. They cannot be re-appointed after their term ends.
Decision-Making Process:
1. The committee meets quarterly (every three months).
2. Decisions are made by majority vote.
3. In case of a tie, the Chairperson has a casting vote.