Key Decisions and Highlights:

1. Interest Rates:

o No Change in Repo Rate: The RBI decided not to change the repo rate, keeping it
steady at 6.50% for the 11th consecutive time. This means the cost at which banks
borrow money from the RBI remains unchanged.

o Other Rates Unchanged: Similarly, rates like the Standing Deposit Facility (SDF) at
6.25% and the Marginal Standing Facility (MSF) and Bank Rate at 6.75% also remain
the same. These rates help manage liquidity and short-term lending in the banking
system.

2. Policy Stance:

o The RBI reaffirmed its neutral stance, meaning it is neither pushing for higher
borrowing (to boost growth) nor tighter controls (to curb inflation).

o The focus remains on aligning inflation with its target levels in a sustainable way,
while also encouraging economic growth.

3. Cash Reserve Ratio (CRR):

o The CRR, which is the percentage of deposits banks are required to hold in reserve
with the RBI, will be reduced from 4.25% to 4% in two phases:

 0.25% reduction starting December 14, 2024.

 Another 0.25% reduction starting December 28, 2024.

o This will free up funds for banks to lend more money, which could boost credit
availability in the economy.

4. Agricultural Credit:

o The RBI increased the collateral-free loan limit for farmers from ₹1.6 lakh to ₹2 lakh
per borrower. This means farmers can now borrow up to ₹2 lakh without needing to
provide assets as security, making credit more accessible to them.

Implications:

 For Consumers: Borrowing costs for loans like home loans, car loans, and personal loans are
unlikely to change since the repo rate remains unchanged.

 For Businesses: Easier credit availability due to reduced CRR could help businesses access
more funds for expansion or operations.

 For Farmers: The higher collateral-free loan limit is a significant step to support agricultural
activities and rural development.

Projection:

Real GDP Growth (Economic Growth Rate):

 What Changed:
The GDP growth forecast has been revised downward across most periods, indicating a
slightly slower economic growth expectation than previously projected in October 2024.
 Slower-than-expected growth could be attributed to factors like global economic
uncertainties and domestic challenges.

CPI Inflation (Price Rise Rate):

 What Changed:
Inflation forecasts have been revised upward, reflecting higher-than-expected
inflation, especially in the short term. This is largely due to seasonal factors, such as
fluctuating vegetable prices.
 The RBI has lowered its economic growth forecast, expecting slower growth due to global
and domestic challenges. Inflation projections have increased in the short term, mainly
because of seasonal factors like rising vegetable prices. Growth is now projected at 6.6% for
FY 24-25, while inflation is expected to average 4.8%.

Global Economic Highlights – December 2024

 Resilient Global Growth:

Despite challenges, the global economy shows steady resilience. Major organizations like the
OECD and IMF have retained their 2024 growth forecast at 3.2%, signaling no major
downturn expected.

 Global Trade and Activity:

 Global trade remains robust, with merchandise trade volumes growing by 3.2%.

 Business activity indicators, like the Global Composite PMI, show consistent expansion
(above 50 indicates growth). November marked the 13th straight month of growth, with
strong performance in services (22 consecutive months of growth) and a slight recovery in
manufacturing.

 Inflation Trends:

 Inflation is easing globally from its historically high levels, but the final stages of reaching
targets are proving to be slow and challenging for both advanced and emerging economies.

 Many central banks worldwide have started lowering interest rates, signaling progress in
tackling inflation.

 Financial Market Volatility:

 Financial markets remain unstable due to a strong U.S. dollar, rising bond yields, and
significant capital outflows from emerging markets. This has also led to increased uncertainty
in stock markets.

 Future Concerns:

 Rising protectionist policies (like trade restrictions) may hurt global economic growth and
could lead to higher inflation going forward.
 India's Economic Growth – Current Scenario (Q2 FY25)

1. GDP Growth Slows to 5.4%:

India’s economy grew slower than expected in the July-September quarter. The main reasons
were weaker private spending (what people spend on goods and services) and investment
activity (money put into business and infrastructure). However, government spending
rebounded after shrinking in the previous quarter.

2. Sector-wise Performance:

o Agriculture and Services: These sectors performed well and helped support overall
growth.

o Manufacturing: Growth slowed due to weaker corporate earnings, but this was
limited to certain industries like petroleum products, iron & steel, and cement.

o Mining: This sector saw a slight decline (-0.1%).

o Electricity: Growth was modest at 3.3%, affected by heavy rains and an unfavorable
comparison with the previous year.

India's Economic Outlook – Supply Side

1. Agriculture:

o Agricultural growth looks promising, supported by a record kharif crop production

of 164.7 million tonnes, up 5.7% from last year’s final estimates.

o Better water availability (thanks to higher reservoir levels) and increased rabi crop
sowing (4.1% higher than last year by November-end) further boost confidence in
agricultural output.

2. Manufacturing:

o Industrial activities are expected to recover post-monsoon as better weather and

increased government spending on infrastructure are likely to help sectors like
mining, electricity, cement, and steel.

o Supply chain conditions have improved, with lower pressure on logistics and
transportation in October and November, despite global uncertainties.

o Positive momentum is reflected in the Manufacturing PMI (56.5 in November),

which shows steady growth (anything above 50 indicates expansion).

3. Services:

o The services sector is performing strongly, with increased activity in logistics and
trade as indicated by a 16.9% rise in E-way bills in October.

o GST revenue collection grew by 8.5%, and toll collections rose by 11.9%, signaling
healthy transportation and commerce.
 o Petroleum consumption rebounded in October, after two months of decline.

o The Services PMI (58.4 in November) shows consistent growth in the sector.

India’s Economic Outlook – Demand Side

1. Private Consumption (Consumer Demand):

o Rural Demand:

 Rural areas are seeing stronger demand than urban areas, as shown by a
24.2% increase in two-wheeler sales in rural regions during October-
November.

 Sales of Fast-Moving Consumer Goods (FMCG) are growing faster in rural

areas compared to urban regions.

 Demand under MGNREGA (government rural employment program) has

dropped by 7.5%, suggesting better farm sector employment and improved
rural income.

o Urban Demand:

 Urban demand is slowing slightly but still showing growth.

 Passenger vehicle sales in cities rose by 11.2% in October-November, driven

by the festive season.

 Domestic air travel increased by 9.6% in October and 13.6% in November,

indicating continued strong consumer mobility.

2. Government Consumption:

o Government spending on items other than interest payments and subsidies grew by
7.2% in Q2FY25 and surged by 47.1% in October 2024, after a decline in the first
quarter of the year. This suggests the government is increasing its spending to boost
the economy.

3. Investment Activities:

o Private manufacturing companies have increased their investments in fixed assets

(factories, machinery, etc.), up by 7.8% year-over-year to Rs. 18.6 lakh crore by the
end of September 2024.

o Manufacturing capacity utilization has improved to 74.7% in Q2FY25, above the

long-term average, showing that factories are being used more efficiently.

4. Trade Flows:

o Exports: India’s merchandise exports (physical goods) grew by 17.2% year-over-year

in October 2024, reaching US$ 39.2 billion.

o Imports: Imports also grew by 3.6% to US$ 66.2 billion, leading to a trade deficit
(more imports than exports) of US$ 27 billion for the month, and US$ 165 billion for
the year so far.
 o Services Exports: India's services exports (such as IT, business services, etc.) have
been a major support, generating a surplus of US$ 17 billion in October and US$ 100
billion for the year.

India's Inflation – Current Scenario

1. Headline CPI Inflation (Overall Inflation):

o Inflation has risen sharply in September and October 2024, mainly due to an
unexpected jump in food prices.

o Food inflation (the rise in food prices) increased significantly, going from 8.4% in
September to 9.7% in October, compared to an average of 5.2% in July-August. This
surge was driven by high prices for vegetables, oils, and fats.

2. Core Inflation (Non-food Inflation):

o Core inflation (which excludes food and fuel) also went up slightly from 3.4% in
August to 3.5% in September and 3.8% in October. This indicates rising prices in
sectors other than food and fuel.

3. Fuel Inflation (Energy Prices):

o Fuel inflation showed a smaller decline than before. This was due to higher
electricity prices and a slower drop in LPG (liquefied petroleum gas) prices
compared to last year.

Outlook on Inflation

1. Food Price Pressures:

o While food prices may soften a bit, food inflation is expected to stay high in the third
quarter (Q3) due to ongoing price pressures.

2. Food Inflation in Q4:

o Food inflation should ease in the fourth quarter (Q4), as vegetable prices usually
drop due to seasonal changes, and the kharif harvest (seasonal crops) will start
arriving in the market, increasing supply.

o Good soil moisture and healthy reservoir levels are expected to support the
production of rabi crops (crops sown in winter), helping to keep food prices stable.

3. Risks to Food Inflation:

o Weather issues (like droughts or floods) could affect crop production, pushing food
prices up.

o Edible oil prices could rise further due to higher import duties and increased global
agricultural prices, which would add pressure on food inflation.

4. Energy Prices:
 o Though energy prices (like oil and electricity) have softened recently, they still need
to be closely monitored, as any rise could impact inflation.

Monetary Policy Approach:

o The MPC has decided to keep things as they are for now (keeping interest rates
unchanged) with a neutral stance, which gives them the flexibility to respond to new
data as it comes in. This means the committee can take further action if necessary,
depending on how inflation and growth evolve.

System Liquidity and Market Conditions

1. Liquidity Surplus and Deficit:

o System liquidity (the availability of money in the financial system) was in surplus
(more money in the system) during October and November, with an extra Rs 1.4
trillion. This was mainly due to higher government spending, even though there was
more currency in circulation during the festive season and capital outflows (money
leaving India).

o However, for a short period at the end of November (from 25th to 29th), liquidity
turned into a deficit (less money in the system) because of GST payments. The
deficit was small, about Rs 0.2 trillion.

2. RBI's Actions:

o The RBI stayed flexible, using various tools to manage liquidity in the market, either
absorbing or injecting money as needed to keep interest rates in check. They used
mechanisms like the Variable Rate Reverse Repo and Variable Rate Repo to keep
the inter-bank overnight rate aligned with the policy repo rate (the main rate set by
RBI).

3. Money Market Rates:

o In the money market, the rates for short-term loans (such as 3-month treasury bills,
certificates of deposit, and commercial papers by non-banking financial companies)
eased slightly by around 8-14 basis points (a small decrease in rates).

4. Call and Repo Rates:

o The weighted average call rate (WACR), which is the average interest rate for short-
term loans in the money market, was 6.51% in October-November, a slight decrease
from 6.53% in the previous months (August-September).

o In the collateralized segment (loans backed by assets), the rates were lower: 6.38%
for triparty repos and 6.40% for market repos.

5. Government Bond Yields:

o The 10-year government bond yield (G-Sec) remained stable in October and
November, even though domestic inflation and rising US bond yields typically push
yields up.
 6. Indian Rupee (INR) and US Dollar:

o The Indian Rupee (INR) depreciated by 1.3% during October-November, mainly due
to the strengthening US Dollar and selling by foreign investors.

o However, compared to other emerging market currencies, the depreciation and

volatility of the INR were less severe.

Financial Stability Overview

1. Bank and NBFC Health:

o The financial health of banks and Non-Banking Financial Companies (NBFCs) is

strong. The Gross Non-Performing Assets (GNPA) ratio (a measure of bad loans) for
Scheduled Commercial Banks (SCBs) improved to 2.54% by the end of September
2024. This means fewer loans are turning bad, indicating better loan quality.

o Key profitability indicators for banks remain solid:

 Return on Assets (ROA): 1.40% (shows how efficiently banks are using their
assets to generate profit).

 Return on Equity (ROE): 14.58% (shows how much profit the bank is making
for every unit of equity).

 Net Interest Margin (NIM): 3.52% (shows how effectively a bank is earning
from its core lending activities).

2. Credit and Deposit Growth:

o The difference between credit growth (loans given out by banks) and deposit
growth (money deposited by customers) has reduced. Deposits are now keeping up
with the loan growth, which is a healthy sign for the banking system, ensuring that
banks have enough funds to lend.

3. Government Scheme Accounts:

o Banks have been asked to separate the accounts of people who receive funds from
various Central/State Government schemes (like Direct Benefit Transfer (DBT)). This
is to ensure that these funds are used properly and that people can access them
without delays or disruptions.

Market Movements After MPC Announcement

1. Government Bond Yields:

o Bond yields (the interest rates on government bonds) increased, meaning the cost of
borrowing for the government went up slightly. This typically happens when
investors expect interest rates to stay higher for longer.

 5-year Government Bonds: Yield increased by 6 basis points (bps) to 6.68%.

 10-year Government Bonds: Yield increased by 6 bps to 6.74%.

  30–40-year Government Bonds: Yields increased by 3 bps and 5 bps to
7.01% and 7.03% respectively.

o SDLs (State Development Loans) and Corporate Bonds followed similar trends,
moving with the respective government bond yields.

2. Stock Market (Nifty):

o The Nifty index (a key stock market index) ended at 24,664, which was almost the
same as its previous closing. This indicates that the stock market didn’t react strongly
to the MPC's announcement on that day.

3. Currency Market (USD/INR):

o The exchange rate between the US Dollar and Indian Rupee (USD/INR) remained
almost unchanged at 84.64, indicating stable market conditions in terms of currency
exchange.

Growth & Inflation Outlook

1. Monetary Policy Decisions:

o The Reserve Bank of India (RBI) kept interest rates unchanged but cut the Cash
Reserve Ratio (CRR) by 50 basis points. This helps inject money into the banking
system to support economic growth. The RBI also acknowledged that while inflation
has been high, the economy is slowing down, leading to a downward revision in the
expected growth for FY25 from 7.2% to 6.6%.

2. Inflation:

o Inflation is expected to remain high in Q3 FY25 but should decrease in Q4 FY25 due
to a good harvest (kharif and rabi crops), which will help lower food prices. The RBI
raised its inflation forecast for FY25 to 4.8% from 4.5% due to these ongoing
pressures.

3. Interest Rates:

o Interest rate decisions will depend on how inflation and economic growth evolve in
the coming months, along with factors like government policy and global economic
changes. If inflation stays high, the RBI may delay cutting rates, but if growth
weakens further, it may be forced to cut rates sooner.

o The CRR cut will provide banks with more money to lend, helping boost the
economy. In 2025, the RBI may cut rates by 50-75 basis points (0.50% to 0.75%) if
growth and inflation move as expected.

4. Government Bond Market:

o The RBI has ensured enough liquidity (money available for lending) in the system
through its CRR cut. However, factors like the global economic situation, especially
interest rate changes in the US, could affect India's interest rates and bond markets.
 5. US Influence:

o The US Federal Reserve (FOMC) meetings and US economic policies, including

presidential transitions, will influence Indian markets. If the US dollar strengthens or
bond yields rise in the US, India may not reduce its interest rates as expected.

6. Bond Yield Expectations:

o The 10-year government bond yield (the interest rate for 10-year loans by the
government) is expected to stay between 6.40% to 6.80% in the coming months.
Longer-term bonds (30-40 years) will see yields in the range of 6.80% to 7.05%.

7. Inflation Risks:

o Risks to inflation could come from high oil prices (if crude oil remains above $85 per
barrel) or any unforeseen growth or inflation issues.

Equity Market Outlook

1. Stock Market (Nifty):

o The stock market, especially the Nifty index, had regained some momentum after a
weak GDP report in Q2. The RBI's CRR cut helped banks by increasing liquidity
(money available for lending), which could boost credit and economic growth.

o Nifty is currently trading at 21.5 times the expected earnings for December 2025.
This means investors are willing to pay 21.5 times the expected earnings of
companies in the index. The outlook for the stock market will depend on signs of
recovery in demand during Q3, and on how the US presidential transition impacts
global financial flows and tariffs.

o Sectors to Watch: The sectors likely to benefit include BFSI (Banking, Financial
Services, and Insurance), consumer staples, IT, consumer discretionary, and
pharma.

2. Market Expectation:

o The market is expected to remain in a range-bound state until clearer signals emerge
on economic recovery, government policies, and the global market situation.

3. Currency Movement (INR/USD):

o The Indian rupee (INR) has been under pressure due to the strength of the US dollar.
The RBI has been selling dollars to prevent a sharp fall in the rupee’s value, which led
to a decrease in foreign exchange reserves. This action helps manage the rupee's
depreciation in a controlled way.

o The INR is expected to trade between 84.5 and 85.5 against the US dollar in the near
term, with the possibility of crossing 85 due to ongoing US dollar strength.

Summary:

 Growth: India's economy is expected to grow at a slower pace than initially thought, with
growth revised to 6.6% for FY25.
 Inflation: Inflation is high but expected to ease in late FY25 due to better agricultural
production.

 Monetary Policy: The RBI has not cut interest rates yet, but it is injecting liquidity into the
system. Future rate cuts depend on how inflation and growth evolve.

 Currency: The Indian rupee is under pressure due to a strong US dollar, and the exchange
rate is expected to remain between 84.5 and 85.5 INR per dollar.

 Stock Market: The stock market outlook is mixed, with key sectors like banking, consumer
goods, and IT expected to perform well, while overall market direction depends on global
and domestic economic factors.