RBI maintains 6.5% Repo Rate, boosts Growth Forecast. December Meeting Highlights

In its today’s monetary policy meeting, the Reserve Bank of India (RBI) has decided to keep the repo rate unchanged at 6.5%, marking the fifth consecutive time. The decision aligns with the central bank's cautious approach, considering the persistent inflation above the 4% target and the fragile global economic environment. RBI Governor Shaktikanta Das highlights the importance of readiness to act when necessary, emphasizing the need for vigilance amid geopolitical uncertainties.

Optimistic Growth Projection for India's Economy

Despite global challenges, the RBI expresses optimism about India's economic resilience. The central bank has revised its real GDP growth projection for the fiscal year 2023-24 to 7%, up from the earlier estimate of 6.5%. This positive outlook is supported by an estimated GDP growth of 6.5% for Q3 and 6% for Q4. The projections for the following fiscal year (FY25) indicate sustained growth, with Q1 at 6.7%, Q2 at 6.5%, and Q3 at 6.4%. These figures slightly surpass the expectations of many economists.

Inflation Forecast Remains Unchanged Amid Supply-Side Challenges

The RBI maintains its inflation forecast, projecting Consumer Price Index (CPI)-based inflation at 5.4% for FY24. The Q3 projection stands at 5.6%, while Q4 is expected to see inflation at 5.2%. Governor Das acknowledges the progress in curbing inflation to below 5% in October 2023, attributing it to a combination of monetary policy measures and government-led supply-side interventions. Despite the advancements, he highlights the need to stay committed to achieving the 4% CPI target and actively pursue a disinflationary monetary policy. The forecast for CPI inflation in Q1FY25 stands at 5.2 percent, for Q2 at 4 percent, and for Q3 at 4.7 percent.

Liquidity Facility Reversal Allowed on Weekends and Holidays

In a move aimed at enhancing fund management by banks, the RBI announces the reversal of liquidity facilities under the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) during holidays and weekends effective from December 30, 2023. The Marginal Standing Facility (MSF) acts as a backup plan offered by the Reserve Bank of India to help banks in emergencies. It allows banks to get money overnight when they can't borrow from other banks. Essentially, if banks find themselves short on funds for lending to each other, they have the option to obtain assistance from the Reserve Bank of India through the MSF. The Standing Deposit Facility (SDF) allows banks to safely store their extra money for a short time.

Enhanced UPI Transaction Limits for Specific Categories

Recognizing the evolving needs of consumers, the RBI proposes an increase in the UPI transaction limit for payments to hospitals and educational institutions. The limit is set to rise from ₹1 lakh to ₹5 lakh per transaction, facilitating higher-value UPI payments for education and healthcare purposes.

Changes in E-Mandate Limit for Recurring Transactions

Under the e-mandate framework, the RBI plans to raise the additional factor of authentication (AFA) limit for recurring transactions. The current limit of ₹15,000 will be increased to ₹1 lakh per transaction for recurring payments related to mutual fund subscriptions, insurance premiums, and credit card repayments.

Final Words

The Reserve Bank of India's recent decisions on monetary policy shows a dedication to maintaining stability, dealing with economic challenges, and supporting growth. The changes in transaction limits and liquidity facilities reveal a careful and thoughtful strategy to adapt to changing financial conditions.