Reserve Bank of India (RBI) Governor Shaktikanta Das-led Monetary Policy Committee (MPC) has decided to keep the key repo rate "unchanged" at 6.5%, a status quo maintained for the 11th time in a row. The RBI Governor says the central bank will also continue with a 'neutral' policy stance.

The RBI slashed cash reserve ratio (CRR) to 4% from existing 4.5%, which is expected to lead to the release of Rs 1.16 lakh crore liquidity to banks and boost their lending power.

"The last mile of inflation is turning out to be prolonged and arduous. The monetary policy has a wide-ranging impact, price stability is important for every segment of society," says RBI Governor Shaktikanta Das.

Das says the growth outlook is resilient but warrants close monitoring. The RBI has cut the GDP growth projection to 6.6% for current financial year, from earlier forecast of 7.2%. The downgrade comes amid a 'major fall' in Q2 FY25 GDP growth to 5.4%, following which many major financial institutions have also cut the full fiscal year growth forecast for India.

In a positive development, Das says high-frequency indicators, however, suggest slowdown in economic activity bottomed out in Q2, and that Q3 and Q4 GDP growth is expected at 6.8% and 7.2%, respectively.

During the previous MPC meeting on October 9, 2024, the RBI's MPC had kept the repo rate unchanged at 6.5%, while unanimously changing the policy stance from ‘withdrawal of accommodation’ to ‘neutral’.

The RBI’s decision to keep the repo rate unchanged at 6.5% for the eleventh straight meeting reflects a "prudent and calculated" approach, says Anirudh Garg, partner and fund manager at Mumbai-based portfolio management services provider Invasset. "As inflationary pressures persist, particularly in food prices, the central bank’s focus on price stability aligns with its commitment to maintaining economic resilience. The upward revision of the inflation forecast to 4.8% for FY25 indicates the RBI’s cautious optimism, acknowledging supply-side challenges while aiming to anchor expectations," says Garg.

"The CRR reduction, releasing ₹1.16 lakh crore into the banking system, is a welcome move to boost liquidity and support credit growth, especially for sectors such as infrastructure and housing," adds Garg.

Divam Sharma, founder and fund manager at Green Portfolio, also says the deduction in CRR is a "positive" move and should impact the banks "positively" and ensure liquidity in the system.

Notably, Finance Minister Nirmala Sitharaman just last month has vouched for bank interest rates to be "far more affordable," saying that this was one requirement if India aspires to become a 'Viksit Bharat' (a developed nation)—not just an aspiration but a reality.

"When you look at India's growth requirements, you can have so many different voices coming out and saying the cost of borrowing is very stressful, and at a time when we want to industry to ramp up and build capacities, bank interest rates will have to be far more affordable," she said at SBI Conclave 2024 in Mumbai.

She said the country needs to have a lot more conversation on this. India's bank interest rates remain high at 6.5%. This places India among countries with "moderately high" interest rates when compared to advanced economies.

Union Commerce Minister Piyush Goyal, during a global leadership summit in Mumbai, had also batted for a key interest rate (repo rate) cut, saying it'll lead to growth. "I certainly believe they should cut interest rates, growth is a further impetus. We are the fastest-growing economy in the world. We can do even better."

Goyal said the largest component of inflation in the inflation basket is food inflation. "I think the chief economic adviser (CEA) had also assessed the whole situation and this is not something I say today, if you look at the archives when I was in the opposition before I came into the government, I have been consistently saying it's a flawed theory that food inflation should be considered while deciding on the interest rate structure."