RBI Keeps Rates Steady, Hints at Possible Cut in February 2024 - Read Now

The Reserve Bank of India (RBI) kept the benchmark interest rate unchanged at 6.5% for the eleventh consecutive time during the December 2024 Monetary Policy Committee (MPC) review. The decision was influenced by persistent inflationary pressures, even as economic growth shows signs of slowing.

Why Did the RBI Hold Rates?

Inflation continues to outweigh growth as the key focus of monetary policy. Governor Shaktikanta Das emphasized the MPC’s responsibility to balance inflation and growth to ensure price stability. Four members of the MPC voted to keep rates unchanged, while two members advocated for a rate cut.

To boost economic activity, the RBI reduced the cash reserve ratio (CRR) by 50 basis points to 4%, aiming to infuse liquidity into the economy. However, inflation trends remain a challenge, especially in food and housing costs.

Survey Insights: Inflation Expectations Still High

According to the RBI’s latest household survey conducted in November 2024, inflation expectations remain high:

• Current inflation perception rose to 8.4% from 8.1% in the previous survey.
• One-year inflation expectations increased slightly to 10.1%.
• Households anticipate rising prices mainly due to food and housing costs.

While expectations of inflation for non-food items and services are moderating, the overall perception remains pessimistic. This inflation psychology can lead to self-fulfilling price hikes as businesses and workers adjust their pricing and wage demands.

Inflation Projections: Can RBI Meet Its Targets?

The RBI forecasts retail inflation at:

• 5.7% for Q3 FY24.
• 4.5% for Q4 FY24.
• 4.6% for Q1 FY25.

However, these projections hinge on stable food prices, especially vegetables, which are subject to unpredictable fluctuations. Previous growth forecasts also missed the mark; Q2 growth was 5.4% against an expected 7%.

Rate Cut in February 2024?

The RBI hinted at potential rate cuts in February 2024, contingent on easing inflationary pressures. Governor Das expects inflation to recede during the January-March quarter, paving the way for a more accommodative stance.

Challenges Ahead for the RBI

Balancing inflation and growth will remain the RBI’s top priority. High inflation expectations pose a risk to economic stability, making it crucial for the central bank to carefully calibrate future monetary policy moves.