The Reserve Bank of India left its repo rate unchanged at 6.50% at its December monetary policy meeting. The Monetary Policy Committee voted 4-2 to hold the repo rate, while the RBI acted separately on the liquidity side, announcing a 50-basis-point reduction in the cash reserve ratio to 4.0%, a measure designed to inject approximately ₹1.16 trillion into the banking system and ease funding conditions for commercial lenders without formally altering the policy rate signal.
Policymakers acknowledged that growth had slowed but argued that high food prices left them with no room to lower borrowing costs without risking an overshoot of the inflation target.
FOOD INFLATION
Consumer price data for October showed food prices running above 9%, pushing headline inflation above the RBI's 4% medium-term target. Vegetables and cereals were among the primary contributors, and the committee noted that seasonal pressures had not yet abated sufficiently to give it confidence that inflation was on a durable downward path that would warrant a formal loosening of monetary conditions.
The committee has reiterated that durable disinflation is a prerequisite for any adjustment to the benchmark rate. The RBI kept its policy stance at neutral, cut its FY2025 growth forecast to 6.6% from 7.2% and raised its inflation projection to 4.8% from 4.5%.
CASH RESERVE RATIO CUT
The 50-basis-point CRR cut, bringing the ratio from 4.5% to 4.0%, was the RBI's principal liquidity measure at this review. The reduction frees up a portion of the reserves that commercial banks are required to hold against their net demand and time liabilities, channelling an estimated ₹1.16 trillion back into the banking system. The move is intended to ease potential liquidity stress: the RBI said that, although banking-system liquidity had remained in surplus in October and November, it could tighten in the coming months because of tax outflows, rising currency in circulation and volatile capital flows.