When the Reserve Bank of India's monetary policy committee (MPC) last met in October 2024, the CPI (consumer price index) had been trending lower; in fact, it had declined below the central bank's targeted 4 per cent in July and August, while GDP growth had been stable. Yet, the MPC had chosen to leave the repo rate unchanged at 6.5 per cent, while shifting its stance to "neutral."
RBI governor Shaktikanta Das stated at the time that the inflation horse had been "brought to the stable" with a lot of effort and that they had to be careful about opening the gate as "the horse may simply bolt again."
Since that policy committee meeting, GDP growth slowed to a seven-quarter low of 5.4 per cent in July-September, prompting the central bank to slash its GDP growth forecast to 6.6 per cent from 7.2 per cent on Friday. At the same time, inflation in October jumped to a 14-month high of 6.21 per cent from 5.49 per cent in September, prompting an upward revision in its forecasts there.
As Das put it on Friday, "The horse made a valiant effort to bolt; our effort is to keep it on a tight leash."
Expectedly, the MPC yet again left the repo rate unchanged at 6.50 per cent. However, it did cut the CRR (cash reserve ratio; percentage of deposits banks must maintain in cash) to 4 per cent from 4.50 per cent. The CRR cut is expected to release primary liquidity of about Rs 1.16 lakh crore in the banking system.
"The RBI has tried to address an unfavourable growth-inflation matrix by reducing the CRR and retaining the repo rate. The CRR was cut to prevent excessive draining of liquidity from the economy, which typically curbs economic growth," explained Dharmakirti Joshi, chief economist at CRISIL.
The CRR cut will provide banks with additional resources to support credit growth and strengthen financial stability, added Manoranjan Sharma, chief economist at Infomerics Ratings. The additional liquidity should also give an impetus to GDP growth, he felt.
The RBI leaving the repo rate unchanged for the 11th time comes at a time when major global central banks have slashed interest rates as protecting growth has gained priority in those economies. The RBI, too, was earlier expected to cut rates from this policy, especially since it had changed its stance to neutral in the October MPC meeting. But, the resurgence in inflation meant rate cuts would have to be postponed further.
What does the current RBI roadmap to tackle inflation look like?
CRISIL's Joshi expects conditions to turn favourable for rate cuts, with the first one in February.
"Inflation is expected to ease towards the end of this fiscal given healthy agricultural output. When the rabi (winter) crop reaches the market, vegetable prices tend to correct sharply. That, in turn, should also improve consumption and growth in the second half of this fiscal," he said.
Achala Jethmalani, economist at RBL Bank, also expects a rate cut beginning in February if inflation moderates.
"The surplus liquidity conditions in the system augur well for faster monetary transmission as and when the window to cut opens up," said Jethmalani.
According to Rajeev Radhakrishnan, CIO of Fixed Income at SBI Mutual Fund, the CRR cut provides adequate signalling with respect to the direction of monetary policy going forward.
"Given the Q2 FY2026 CPI projections (RBI expectation of 4 per cent), in the absence of any incremental inflation shocks, the February review could be live for a repo rate reduction," he said.
Sujan Hajra, chief economist at Anand Rathi Shares, though, feels a rate cut may not happen before April 2025.
"The cut in GDP forecasts for FY25 by 60 bps was confusing given the expectations of material improvement in economic activity in the second half. We continue to hold our full-year projections for FY2025 at 7 per cent. If we go by RBI's forecasts for improvement in economic momentum with higher CPI forecast for the full year along with a CRR cut intended to ease liquidity and thus lower the money market rates, the need for a February 2025 cut is lower and expect RBI to enter the easing cycle from April," said Hajra.
Abhishek Bisen, head of fixed income at Kotak Mahindra AMC, meanwhile expects a 50 basis points easing in interest rates in the first half of calendar year 2025.
Aurodeep Nandi, India economist and executive director at Nomura, among the very few who had expected a repo rate cut of 25 bps in this meeting, opined that the RBI continues to prioritise inflation over growth rescue, although the inflation increase was concentrated in a few food items.
"Our view remains that the growth glass is half empty, not half full, and the recent sharp slump in GDP growth should have highlighted the higher growth sacrifice involved in keeping policy rates elevated," said Nandi.
With two MPC members dissenting against the decision to hold rates this time versus one earlier, he believes the policy paradigm could be shifting.