India cuts banks’ cash reserves ratio by 50bps; lowers full-year GDP forecast

MUMBAI (ICIS)–India’s central bank on Friday maintained its benchmark interest rate at 6.5% but cut its cash reserve ratio (CRR) by 50 basis points to 4%, in a bid to improve growth and rein in high inflation.

• Monetary policy stance kept at “neutral”
• Year-to-March 2025 GDP growth forecast cut to 6.6% from 7.2%
• High food prices to keep consumer inflation elevated in Oct-Dec 2024

In its monetary policy decision, the Reserve Bank of India (RBI) retained its monetary policy stance at “neutral”. It has maintained the repo rate at 6.5% since February 2023.

CRR is the percentage of a bank’s total deposits that it is required to maintain in cash with the RBI as a reserve.

India is a giant emerging market in Asia and is a major importer of petrochemicals.

The central bank’s hawkish outlook is due to persistently high food inflation, which has yet to stabilize, RBI governor Shaktikanta Das said during his address to the media.

While the central bank remains optimistic about India’s growth outlook, following a good monsoon season and an anticipated revival of capital expenditure, global factors could slow down growth, Das said.

“Headwinds from geopolitical uncertainties, volatility in international commodity prices, and geo-economic fragmentation continue to pose risks to the outlook,” RBI said in its official statement.

The outlook is also “clouded by rising tendencies of protectionism which have the potential to undermine global growth and push inflation higher”, it added.

RBI has lowered its GDP growth forecast for the fiscal year ending March 2025 to 6.6%, from 7.2% previously, in view of weak fiscal Q2 performance.

India’s GDP for the July-September quarter slowed to an almost two-year low of 5.4%, on sluggish growth and weak demand. It was also significantly lower than the RBI’s projection of a 7% growth for the quarter.

RBI GDP Forecasts	New – 6 December 2024	Old
October-December (Q3)	6.8%	7.4%
January-March (Q4)	7.2%	7.4%
Fiscal year ending March 2025	6.6%	7.2%
April-June (Q1 FY2025-26)	6.9%	7.3%
July-September (Q2)	7.3%	–

Meanwhile, inflation forecast for the current fiscal year was raised to 4.8% from 4.5% on continued high food inflation.

“Inflation increased sharply in September and October 2024, led by an unanticipated increase in food prices. Core inflation, though at subdued levels, also registered a pickup in October,” Das said.

In October, consumer inflation had risen to a 14-month high of 6.21% due to a spike in food prices.

The RBI expects food prices to keep inflation rates elevated in the October-to- December quarter, Das said.

RBI inflation forecasts	New – 6 December 2024	Old
October-December (Q3)	5.7%	4.8%
January-March (Q4)	4.5%	4.2%
Fiscal year ending March 2025	4.8%	4.5%
April-June (Q1 FY2025-26)	4.6%	4.3%
July-September (Q2)	4%	–

Focus article by Priya Jestin