The Reserve Bank of India on Friday kept its key interest rate unchanged citing inflation risks, but cut the Cash Reserve Ratio that banks are required to park with the central bank, boosting money with lenders to support a slowing economy.
With India’s GDP seeing a sharper-than-anticipated dip in the July-September period to 5.4%—its slowest pace in seven quarters, inflation on the uptick and rupee under pressure, the Reserve Bank of India (RBI) had few choices to make.
Its monetary policy committee, which consists of three RBI and an equal number of external members, kept the repurchase or repo rate unchanged at 6.5% for a record 11th meeting in a row.
Four of the six members of the panel voted for a status quo in rate, while retaining its policy stance at “neutral”. External members—Nagesh Kumar and Ram Singh—voted for a quarter-point reduction.
RBI Governor Shaktikanta Das said the Cash Reserve Ratio—the proportion of deposits that banks must set aside with the central bank—has been cut by 50 basis points to 4%, effective in two tranches on December 14 and December 28.
The cut will infuse Rs 1.16 lakh crore into the banking system and will soften short-term interest rates and can reduce the pressure on bank deposit rates.
“At this juncture prudence and practicality demands we remain careful,” Das said. A status quo is “appropriate and essential,” he said, adding if growth slowdown lingers beyond a point, “it may need policy support”.
RBI lowered its growth forecast for the year ending March 2025 to 6.6%, from its earlier projection of 7.2%. This even though Das said GDP slowdown bottomed out in the July-September quarter and has seen a pick-up in subsequent months due to festival spending and strong agriculture output.
It also raised its inflation forecast for the current 2024-25 (April 2024 to March 2025) financial year to 4.8%, from 4.5% previously.
Inflation has remained above the RBI’s 4% target, with price gains accelerating to a 14-month high of 6.21% in October.
Das, in his last monetary policy before his second three-year term as Governor ends on December 10 unless it is extended by the government, shunned calls from Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal for lowering borrowing costs.
Das said the central bank will need to wait for data to confirm a decline in inflation.
Back in 2021, when he was last given an extension, the government had announced it more than a month in advance.
The RBI Governor had in October stated that an immediate interest rate cut can be “very premature” and “very, very risky”, and that he was in no hurry to join the global central banks in easing.
On Friday he said, “As a central bank, our job is that of an anchor of stability and confidence, which would ensure that the economy achieves sustained high growth.”
The cut in the CRR will boost liquidity that is under strain following RBI’s interventions to keep the rupee from falling, and is extended to tighten further into mid-December ahead of advance tax outflows. The CRR was last lowered in 2020.
The RBI also announced a raise in the interest rate caps on the diaspora’s foreign currency deposits, in a move aimed at attracting more capital flows amid pressures on the rupee.
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, “While retaining its focus on last-mile disinflation being achieved, the RBI has taken note of the tightening durable liquidity and hence delivered the CRR cut. We see room for a 25 basis points repo rate cut in February with much dependent on the downside risk to growth which we foresee.”
Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings, said RBI governor’s statement highlights the increased dilemma on growth-inflation balance, amidst sticky headline inflation and a slowdown in growth seen in the July-September quarter of this fiscal year.
“In particular, RBI’s forecast for Q4 (January-March) has been raised to 4.5%, which highlights the challenges of bringing down headline inflation near to 4%. This, therefore, will continue to keep a question mark on the expected rate cut in February”.
The new global normal with improved US economy, lower rate cuts by the US Fed and a stronger dollar have also made it difficult to go for a rate cut without a very significant weakness in the growth trajectory, he said.
Das said, in India, notwithstanding the recent aberration in the growth and inflation trajectories, the economy continues its journey on a sustained and balanced path towards progress.
He saw food inflation pressures continuing to linger in Q3 (October-December) and start easing only from Q4, backed by seasonal correction in vegetables prices, Kharif harvest arrivals, likely good Rabi output and adequate cereal buffer stocks.
“Going forward, as food price shocks wane, headline inflation is likely to ease and realign with the target as per our projections. At present, it is necessary to draw on the flexibility provided by the neutral stance to wait for and monitor the incoming data for confirmation of the decline in inflation,” he said.
Among other measures, the RBI announced raising the limit for collateral-free agriculture loans from Rs 1.6 lakh to Rs 2 lakh per borrower to enhance credit availability for small and marginal farmers.
Also, small finance banks have been permitted to extend pre-sanctioned credit lines through the UPI.
Moreover, the RBI will set up a committee of experts from diverse fields to recommend a Framework for Responsible and Ethical Enablement of AI (FREE-AI) in the financial sector.
