The Reserve Bank of India’s (RBI) announced its fifth bi-monthly monetary policy of FY25. The six-member Monetary Policy Committee (MPC) led by RBI Governor Shaktikanta Das decided by a 4 to 2 majority to keep the benchmark repo rate unchanged at 6.5% for the eleventh straight meeting, and maintain the monetary policy stance ‘Neutral’ and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth. Moreover, the rate setting panel slashed the cash reserve ratio (CRR) by 50 basis points (bps) to 4%.
Growth in H2 looks better than H1FY25. RBI will use various policy instruments to restore the inflation-growth balance, says RBI Governor Das.
Inflation has to be brought down in the interest of sustainable growth. MPC remains committed to restore balance between inflation and growth, says RBI Governor Shaktikanta das in post monetary policy presser.
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, and FX cost of rate cuts, a CRR cut of 50 bps was the least costly measure for them, says Madhavi Arora, Lead Economist, Emkay Global Financial Services.
CRR reversal to pre-Covid 4% level implies an infusion of Rs 1.2 trillion at a time when core liquidity may steadily move to a deficit ahead with unsterilized FX intervention and CIC leakages. More importantly, this liquidity infusion could lead to better and immediate transmission of cuts as and when the RBI commences the (shallow) cut cycle amid the limited window. Had there been no policy support, the system liquidity deficit would likely have crossed Rs 3 - 3.5 trillion by end-March 2025 as per our estimates, she said.
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, Arora added.
The surplus liquidity conditions in the system augur well for faster monetary transmission as and when the window to cut opens-up. The time is ripe for deposits to be locked-in and expect softer borrowing rates in 1H of next year. If inflation moderates, we will see the first rate cut come through in February 2025, says Achala Jethmalani, Economist, RBL Bank.
RBI governor's statement for the latest MPC highlights the increased dilemma on growth-inflation balance, amidst sticky headline inflation and a slowdown in growth seen in Q2. As expected, MPC has attempted to address it by a cut back in CRR by 50 bps while keeping the status quo on the benchmark rates. Higher system liquidity will soften short term interest rates and can reduce the pressure on bank deposit rates, says Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings.
In particular, RBI's inflation forecast for Q4 has been raised to 4.5% which highlights the challenges of bringing down the headline inflation to near 4%. This, therefore, will continue to keep a question mark on the expected rate cut in February 2025. The new global normal with improved US economy, lower rate cuts by Fed and a stronger USD have also made it difficult to go for a rate cut without a very significant weakness in the growth trajectory, Chowdhury added.
