MPC meet: Status quo on rates, cut in CRR to ease liquidity pain

Mumbai: The central bank’s rate-setting panel on Friday kept policy rates unchanged for its 11th straight review meeting, but slashed the cash reserve requirement, which could ease borrowing costs and opens a window to begin the easing cycle in its next meeting. It temporarily lifted the cap on interest rates on US dollar deposits, amid the rupee’s slide triggered by outflows from portfolio investors.

Cash reserve ratio (CRR) was reduced by half a percentage point, to 4% in two tranches, in anticipation that liquidity will tighten in the coming months.

Presenting the last policy review of his second term, Reserve Bank of India (RBI) governor Shaktikanta Das scaled down FY25 gross domestic product (GDP) growth projections to 6.6%, from 7.2%, while raising the inflation estimates to 4.8%, from 4.5%.

Near-term inflation and growth outcomes have turned somewhat adverse since the October policy, he said. “Persistently high inflation reduces the purchasing power of consumers and adversely affects both consumption and investment demand,” Das said in the policy statement. ‘Focused on Durable Alignment of Inflation’
“The overall implication of these factors for growth is negative,” said the RBI governor. Four of the six monetary policy committee (MPC) members voted to keep the repo rate unchanged at 6.5%, with external members Nagesh Kumar and Ram Singh voting for a rate cut of 25 basis points. In the October review meeting, the decision to maintain a status quo on rates was backed by a 5-1 vote. One basis point is a hundredth of a percentage point.

The MPC, while acknowledging recent challenges that prompted more circumspect FY25 growth estimates, said the panel decided to “remain unambiguously focused on a durable alignment of inflation with the target” to underscore its determination to win the war against a price spiral.

The governor’s second term will end on December 10, and the government is yet to announce either an extension for the incumbent or his successor.

Liquidity Lever
All six members of the MPC voted to maintain a neutral stance on policy, which gives RBI the flexibility to lower or raise rates “depending on the evolving inflation trajectory.”

In a media interaction after the monetary policy, Das said RBI will use various policy instruments to create conditions for restoring the inflation-growth balance. Lowering of CRR will inject ₹1.16 lakh crore into the banking system and help banks improve their margins, allowing them to lend more. Banks do not earn any interest on the deposits parked with the RBI as CRR.

Separately, the central bank also raised interest rate ceilings on FCNR(B), or foreign currency non-resident bank, deposits to attract dollar deposits and stem depreciation in the rupee, which has fallen 1.3% since the start of this fiscal year.

The BSE Sensex closed almost flat at 81,709, while the NSE Nifty50, too, was flat and closed at 24,677. The rupee closed at 84.69 per dollar after touching a high of 84.53. It had closed at 84.73 on Thursday. The government bond yield rose 6 basis points at 6.74%.

Balancing Growth & Inflation
Headline inflation was well above the central bank’s target of 4% for the last two readings in September and October, while the growth print in the second quarter, at 5.4%, was below its 7% projection. “High inflation reduces disposable income in the hands of consumers and dents private consumption, which negatively impacts real GDP growth,” Das said.

Anubhuti Sahay, India economist at Standard Chartered Bank, expects a 25bps repo rate cut in February and April, adding that the “move (CRR cut) also helps in the right sequencing of policy measures as transmission of any repo rate cut amid tight liquidity would have been challenging.”

On the decision to maintain policy rates, the RBI policy statement said the MPC, “while supporting growth,” was focused on bringing inflation down durably to the legal mandate.