The Reserve Bank of India (RBI) maintained the policy rate at 6.5% for the 11th consecutive time on Friday, reduced the economic growth forecast to 6.6% for 2024-25 from 7.2% previously, and reduced the cash reserve ratio (CRR) by 50 basis points to 4%, which is expected to free up nearly 1.6 lakh crore for banks and help moderate lending rates.

The substantial reduction in GDP growth prediction comes amid a decline in economic growth during the second quarter, which fell to a seven-quarter low of 5.4%. The RBI has increased its FY25 inflation prediction to 4.8% from 4.5%.

"Since the prior policy, inflation has risen as growth has moderated. As a result, the MPC has taken a careful and cautious stance in this meeting, waiting for better visibility on the GDP and inflation prospects. At such a critical juncture, prudence, practicality, and timing of decisions become even more important," RBI Governor Shaktikanta Das said in a statement following the monetary policy committee meeting.

The monetary policy committee meeting saw two members vote for a rate drop, while four others supported the status quo.

CRR refers to the portion of deposits that are impounded by the RBI in order to maintain a liquidity buffer and control the money supply. The CRR reduction will occur in two stages during the second half of December. CRR was previously raised to 4.5% in May 2022, following market instability caused by Russia's invasion of Ukraine.

According to Das, growth is projected to accelerate in the next quarters. "Going forward, high frequency indicators available so far indicate that the slump in domestic economic activity bottomed out in Q2:2024-25 and has since recovered, boosted by robust festive demand and an increase in rural activities. Healthy kharif crop production, increased reservoir levels, and better rabi planting all help to drive agricultural growth. Industrial activity is projected to normalize and recover from the previous quarter's lows," Das stated.

Expectations for a rate cut rose after growth fell to a near-two-year low in the July-September quarter, and there have been increased calls for rate cuts against the backdrop of a slowdown in urban consumption due to severe inflationary pressures, mostly driven by food. Before beginning his formal monetary policy announcement, Das defended inflation targeting and the monetary policy framework.

Senior government ministers have called for interest rate cuts, stating that the central bank should not be misled by excessive food inflation, which they ascribe to supply-side and weather-related concerns. "We hold regular discussions with the government about inflation and supply-side issues. The RBI Act mandates us to target headline inflation; we cannot use discretion to target core, food, or fuel inflation." Das stated that the headline inflation objective is legally binding.