RBI holds Repo rate steady, reduces CRR to 4% maintains ‘Neutral’ stance

The Reserve Bank of India (RBI) announced its fifth bi-monthly monetary policy for FY25 today, December 6, 2024. The announcement comes amid economic challenges such as lower GDP growth, inflation, and concerns over tight liquidity conditions in the banking system. The RBI’s rate-setting committee (MPC) kept the benchmark key policy rates unchanged, Repo at 6.5% for the eleventh straight meeting and maintained the monetary policy stance ‘Neutral’ and reduced Cash Reserve Ratio (CRR) to 4% from the existing 4.5%.

The CRR cut now announced in the MPC policy decision could release up to ₹1.2 lakh crore that will have a significant impact by injecting much-needed liquidity into the banking system.

The rupee could gain support from the RBI’s efforts to manage liquidity in the banking system, whether through a reduction in the CRR to 4% or Open Market Operations (OMO) — the central bank’s practice of buying or selling government securities in the open market. This adjustment would enable the central bank to step in more effectively in the forex market through dollar sales whenever required.

Key policy rates :

*CRR at 4.25 per cent of its net demand and time liabilities effective from the reporting fortnight beginning December 14, 2024, and 4.00 per cent of net demand and time liabilities effective from the fortnight beginning December 28, 2024

**SDF is the new floor for policy rates introduced by RBI in April 2022, as a mechanism to curb inflation by absorbing liquidity. The SDF rate applies to banks that park their excess funds with the RBI without collateral. However, the earlier system of reverse repo rate will remain part of RBI’s toolkit and its operation will be at the discretion of the RBI for purposes specified from time to time, according to RBI’s announcement. This move of RBI makes the reverse repo rate redundant for now.