The monetary policy committee of the Reserve Bank of India (RBI) kicked off its three-day deliberations on Wednesday amid expectations of a status quo in rates because of elevated inflation.
However, some economists are not ruling out a cut in the cash reserve ratio (CRR) which will infuse liquidity into the system. CRR is that portion of deposits which banks must maintain with the RBI. It stands at 4.5 per cent.
A CRR cut will be the first since 2020: in March 2020, the central bank brought it down 100 basis points to 3 per cent.
Subsequently, it raised CRR in a phased manner to 4 per cent in February 2021 and to 4.5 per cent in May 2022.
Additional liquidity from any relaxation in CRR can be used for on-lending purposes, thereby pushing credit growth. Liquidity had recently slipped to a deficit mode because of RBI’s intervention in the forex market.
The RBI finds itself in a delicate situation as inflation has surpassed the upper tolerance level of 6 per cent, while India’s GDP growth in the second quarter of this fiscal came in at a tardy 5.4 per cent.
The mandate for MPC is keep retail inflation — based on the consumer price index — at 4 per cent with a margin of 2 per cent on the either side.
Economists feel the RBI will give more importance to inflation over growth and maintain the repo rate at 6.50 per cent.
“Even as the RBI’s growth/inflation forecast will see significant downward/upward revisions, an immediate rate cut may not be easy for the MPC to justify, especially as their commentary has been assertive on durable disinflation being the primary mandate’’, a note from Emkay Research said.
The brokerage said non-conventional policy tools such as liquidity easing could be a good balancing act, with a CRR reversal to pre-Covid 4 per cent level implying an infusion of ₹1.2 trillion into the banking system.
The RBI has retained the repo rate at 6.5 per cent since February 2023.
While some experts feel a cut could come in February 2025, others said a reduction was a possibility only in the next fiscal year.
“We do not foresee rate cut during the current FY (financial year). First rate cut and further change in stance likely in April 2025,” a SBI research report said.
The report said headline inflation continues to remain at uncomfortable levels, and the RBI should not react to the fall in second quarter growth by cutting rates.
“In the last MPC meeting in October, RBI had held rates but changed its stance to neutral led by cooling of inflation at that point. The recent data points to higher inflation of 6.21 per cent in October and lower GDP growth of 5.4 per cent in the second quarter, which puts RBI in a tricky position, acting as a dampener to hopes of a rate cut’’, Suresh Darak, founder, Bondbazaar, said.
"While pressure would mount on the RBI to cut rates for boosting growth, the recent higher inflation along with the weakening of the INR against the dollar over the last couple of weeks would also play on the MPC’s mind,’’ he said.
