The Reserve Bank of India (RBI) is set to announce its latest monetary policy decision on December 6, 2024, following a three-day meeting of the Monetary Policy Committee (MPC) that began on December 4. This announcement comes at a critical juncture as the Indian economy faces a dual challenge of elevated inflation and slowing economic growth. The central bank’s decision will be closely watched by economists, policymakers, and market participants alike.
Current Repo Rate Status
The RBI has maintained the repo rate—the rate at which it lends money to commercial banks—at 6.5% since February 2023, marking ten consecutive meetings without any changes. This pause followed a series of aggressive rate hikes between May 2022 and February 2023, during which the repo rate was raised by a cumulative 250 basis points to combat surging inflation. The government has mandated the RBI to keep consumer price index (CPI)-based inflation at 4% with a tolerance band of ±2%, but recent trends have made this target increasingly difficult to achieve.
Inflation Concerns
Inflation remains a key concern for the RBI. In October 2024, headline inflation rose to 6.2%, driven primarily by volatile food prices. This marked the fastest pace of price increases in over a year and kept inflation above the RBI’s upper tolerance limit of 6%. While food inflation has been particularly problematic, core inflation (which excludes food and fuel) also remains sticky, complicating the central bank’s efforts to anchor price stability.
Despite these challenges, Governor Shaktikanta Das has ruled out an immediate rate cut in previous statements, emphasizing that inflation control remains a priority for the central bank.
Economic Growth Slowdown
On the other hand, economic growth has shown signs of faltering. GDP growth for the July-September quarter slowed sharply to 5.4%, well below expectations and raising concerns about whether restrictive monetary policies are dampening economic activity. The RBI had previously forecasted annual GDP growth at 7.2% for FY2024-25, but this projection now appears optimistic given current trends. Economists expect the central bank to revise its growth forecast downward by 30-40 basis points, with some projecting full-year growth closer to 6%.
This divergence between high inflation and slowing growth presents a significant policy dilemma for the MPC as it seeks to balance its dual mandate of price stability and economic growth.
Market Expectations
Market participants largely expect the RBI to maintain status quo on interest rates during this meeting while potentially signaling readiness for future easing if economic conditions worsen further. Bond traders have already begun pricing in potential rate cuts in early 2025, with yields falling across tenures and swap rates declining significantly in recent weeks.
Additionally, analysts anticipate that the RBI may introduce liquidity measures such as reducing the cash reserve ratio (CRR)—the proportion of deposits banks must hold as reserves—to address tight liquidity conditions in the banking system. Core banking system liquidity surplus has declined sharply from ₹4.5 trillion in September 2024 to just ₹1.2 trillion, partly due to capital outflows and forex interventions by the central bank.
Governor Shaktikanta Das’ Final Term Meeting
This MPC meeting is particularly significant as it marks Governor Shaktikanta Das’ final scheduled meeting before his term ends on December 10, 2024. While there is no official word yet on whether he will receive an extension or be succeeded by another candidate, speculation around his future adds an additional layer of interest to this week’s policy announcement.
Das has played a pivotal role in steering India’s monetary policy through challenging times since taking office in December 2018, including navigating through COVID-19 disruptions and managing post-pandemic recovery efforts.
Conclusion
The Reserve Bank of India’s monetary policy decision on December 6 will be critical in shaping market sentiment and providing direction for India’s economy amid conflicting pressures from high inflation and slowing growth. While most experts predict that the repo rate will remain unchanged at 6.5%, attention will also focus on potential liquidity measures like CRR adjustments or long-term repo operations that could signal an eventual shift toward monetary easing in early 2025.
Governor Shaktikanta Das’ leadership during this crucial period underscores his commitment to balancing competing priorities while maintaining financial stability—a legacy that may continue if his term is extended or influence future policymaking under new leadership.
