However, it reduced the cash reserve ratio (CRR) — the minimum percentage of deposits that banks must keep in cash with the central bank — from 4.5 per cent to the pre-pandemic level of 4 per cent, as it tries to delicately balance economic growth and inflation.

The reduction will take place in two tranches of 25 basis points each, once on December 14, and again on December 28, a move that will address the liquidity crunch driven by a depreciating rupee and outflow of capital. Between April and November, the Indian rupee depreciated by 1.3 per cent, largely due to the strengthening of the US dollar on the one hand, and selling pressure by foreign portfolio investors in October and November.

The sharp cut in CRR will infuse about Rs 1.16 lakh crore into the system, which is likely to boost credit offtake and spur economic activities. Analysts expect the central bank to finally reduce the interest rate in February.

“Overall, we appreciate RBIs calmness despite recent GDP data, and their focus on long-term objectives,” Nikhil Gupta, chief economist, Motilal Oswal Financial Services Group, said in a note. He added that rate cuts could begin from February next year or even later.

How CRR Cut Can Impact Economy

A lower CRR rate increases liquidity in the system. More money will be available to the banks to extend credit or use in some other ways. A CRR cut will also have a direct impact on the banks’ cost of funds.

However, based on internal assessments, banks will then have to take a decision on whether or not to pass the benefits and lower interest rate to end-borrowers. Banks will have the flexibility to use the surplus funds as per their own business and operational requirements.

Also, the CRR influences loan interest rates, and can indirectly affect the interest you earn on your savings.

RBI’s Projections

The RBI has also reduced the overall GDP growth projection for the current financial year from the earlier 7.2 per cent to 6.6 per cent. It has pegged the economic growth in the third quarter to clock 6.8 per cent, and 7.2 per cent in the fourth and final quarter of the current financial year. Interestingly, RBI’s growth projection for the full financial year is higher than most recent estimates, in the wake of the 5.4 per cent growth rate announced for July to September period, which was much lower than anticipated.

The RBI’s inflation projections have been revised as well. It has now projected the headline inflation to touch 4.8 per cent in 2024-25, up from 4.5 per cent estimated earlier.

In his last policy decision before his current term ends, RBI Governor Shaktikanta Das announced that the slowdown in growth was due to subdued performance of manufacturing companies, contraction in mining activity and lower electricity demand. However, he pointed out that the weakness in the manufacturing sector was not broad-based, but limited to specific sectors such as petroleum products, iron and steel, and cement.

“Since the last MPC meeting, financial markets have remained edgy amids a rising US dollar and hardening bond yields, resulting in large capital outflows from emerging markets and volatility in equity markets,” Das said. “Going forward, the outlook is clouded by rising tendencies of protectionism, which have the potential to undermine global growth and push inflation higher,” he said, adding that government capital expenditure is expected to pick up in the second half, providing the necessary impetus to cement, and iron and steel sectors.

The central bank pegged the real GDP growth for the first quarter of 2025-26 at 6.9 per cent, and for the second quarter at 7.3 per cent. CRISIL ratings said the RBI sees the second quarter slowdown as transitory and localised to a few manufacturing sectors, and expects things to turn around in the second half.

Subhash Garg, former Finance Secretary, told The Secretariat that India’s annual growth could be lower than 6 per cent, though economic activities in the second half is set to improve “It will be interesting to see how things pan out in the second half. Though the situation may be better, challenges remain. I will not be surprised if the growth rate for the full fiscal year falls below the 6 per cent mark,” he said.

Other Growth Estimates

The State Bank of India, in its report last week, pegged the annual growth rate at less than 6.5 per cent. It said that with 6.0 per cent real GDP expansion in the first half of the current financial year, the overall growth for the full fiscal would be less than 6.5 per cent — assuming 6.5 per cent growth in the third quarter, and 6.8 per cent in the fourth.

Earlier in July, the economic survey — the government’s own report card — estimated India’s annual growth rate at between 6.7 and 7 per cent.

Divergence In Views Among MPC Members

Once again, the divergence in opinions among the MPC members was pronounced, with four of the six-member MPC committee voting to hold rates. In August, too, the MPC had split votes by 4:2.

“The split shows that divergence in opinion continues to dominate and that the members have different views on the state of the economy,” an analyst, on condition of anonymity, said. 

Several policy watchers have questioned the RBI’s stand on interest rate, especially as it has failed to control prices. “It is clear that RBI’s policy measures have failed to control inflation. The decision to hold on to (interest) rates has only dented economic growth,” Garg said.

“In any case, RBI’s policy measures have limited impact on controlling food inflation, which is primarily driven by supply-side management,” he further said, adding that the central bank’s move may be aimed at protecting the profit margins of banks.