RBI Policy 2024 Analysis: GDP Projections and Repo Rate Changes

 

Stability of Repo Rate

The repo rate, or the rate at which the RBI lends to commercial banks, has remained unchanged since February 2023. This stability is of prime importance in that it suggests the RBI will look at both taming inflation and helping economic growth.

Governor Shaktikanta Das said that durable price stability can enable a strong growth driver. MPC's decision to leave the repo rate unchanged was unanimous at 4:2, reflecting sharp divergence among the Committee members' opinions on whether the MPC's unfolding deceleration in economic growth needs rate action.

 

GDP Growth Forecasts

In a notable adjustment, the RBI has revised its GDP growth forecast for the financial year 2024-25 (FY25) from 7.2% to 6.6%. This revision reflects concerns over a slowdown in economic activity, particularly after the GDP growth for Q2 FY25 fell to 5.4%, marking the lowest level in two years.

The revised quarterly estimates indicate a gradual recovery, with projections of 6.8% growth for Q3 FY25 and 7.2% for Q4 FY25. The slowdown has been blamed on the weak performance of sectors such as manufacturing and mining, which are battling increased input costs and erratic demand.

Despite these challenges, high-frequency indicators suggest that domestic activity may be stabilizing due to festive demand and increased rural economic activity.

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Economic Implications

The RBI's decision not to change the repo rate and to revise downward GDP growth projections for RBI monetary policy 2024 reflects a very cautious approach to monetary policy. The RBI kept borrowing costs unchanged to support liquidity in the banking system and ensure adequate credit flow to companies. This is especially true for small businesses in rural areas, where higher limits for agricultural loans are recently being introduced.

Also, the Cash Reserve Ratio (CRR) was reduced from 4.5% to 4%, which is expected to add around ₹1.16 lakh crore into the banking system. This  is aimed at further bolstering liquidity and supporting lending activities.

 

Inflation Outlook

RBI monetary policy 2024 revised its inflation estimate from 4.5% to 4.8% in FY25. This came after careful consideration of the relentless pressure of the food index and other constituent prices, which continue to increase the cost for consumers and businesses. In this context, the central bank continues to be on guard against inflationary risks, even as it seeks to achieve and maintain inflation at its target level over time.

Conclusion

The measures announced by the RBI during the December 2024 monetary policy sessions affirm its role in treading the fine line between high underlying inflation and slowing growth. While leaving the repo rate unchanged, the RBI tries to maintain the fine line that most of the economic sectors currently are in between stability and recovery.