The Reserve Bank of India (RBI) on December 6 stayed in line with the expectation of economists by keeping the key policy rates unchanged at 6.5 percent as inflation stayed above the central bank’s comfort zone and a slowdown in economic growth forced it to revise its forecast downward.
At the same time, the Monetary Policy Committee (MPC) lowered the cash reserve ratio (CRR) by 50 basis points (bps) to support economic activity, with the revision mapped out in two tranches of 25 bps each for December 14 and 28.
"The MPC's decision to keep the repo rate unchanged was along the expected lines, with the CPI inflation exceeding the MPC's upper threshold of 6 percent. However, the cut in the CRR by 50 bps would help support growth, after the sharp downward revision in the forecast for FY2025," Aditi Nayar, chief economist at ICRA, said. Reacting to the MPC announcement, she stressed on the impact of inflation on the central bank’s decision-making.
Nayar highlighted the potential for monetary easing if inflation moderates. “If the CPI inflation retraces to below 5 percent by the December 2024 print, the likelihood of a repo cut in February 2025 will rise sharply,” she noted.
Consumer Price Index (CPI) inflation has been a significant concern for policymakers, hovering above the RBI’s comfort zone of 2-6 percent in recent months. The central bank is closely monitoring inflation dynamics, especially as global crude oil prices and geopolitical uncertainties add to the risks.
India’s GDP growth rate of 5.4 percent in Q2 FY2024 was the slowest in nearly two years, raising concerns over the economic momentum. With global demand waning and domestic consumption facing headwinds, the RBI’s liquidity-enhancing measures through the CRR cut are expected to provide some respite.
"Initial response is one of disappointment as the Repo rate has been left unchanged. With forecast CPI inflation at 4.8 percent, well within the upper limit and the prospects of a good Kharif harvest that will soften food and vegetable prices, this was the time to cut the repo rate. Food demand and prices are not driven by monetary conditions. However, the reduction in the CRR will bring in more liquidity that will enable commercial banks to disburse more credit and even consider softening their lending rates in face of weak demand for bank credit from private industry," former NITI Aayog vice-chairman Rajiv Kumar told Moneycontrol.
The rate-setting panel of the RBI retained its policy stance at 'neutral', with four out of six members voting to keep the repo rate unchanged.
“Policy tradeoffs have become even more perplexing with the emerging cracks in the domestic story with the economy stuck in a stagflationary state. And given the challenges around timing and window of conventional rate cuts, a CRR cut of 50bp was the least costly measure for them. Going ahead, while rate cuts would still be a tricky call, we also keep a watch on unconventional measures, specifically, easing regulatory lending norms gradually ahead in order to re-spur waning credit offtake,” Madhavi Arora, Lead Economist, Emkay Global Financial Services said.
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