The Reserve Bank of India (RBI) did a balancing act between inflation and growth on Friday as it left the repo rate unchanged at 6.50 per cent but cut the cash reserve ratio (CRR) by 50 basis points to 4 per cent that will release ₹1.16 lakh crore into the banking system.

CRR is that portion of bank deposits which must be maintained with the RBI in liquid cash. In other words, for every ₹100 of bank deposits, they must maintain ₹4 with the RBI. Banks do not earn any interest on these deposits.

A rate reduction in this liquidity management tool will leave more cash in the hands of banks which can be used for lending, stimulating economic growth which fell to a seven-quarter low of 5.4 per cent in July-September 2024.

The RBI’s announcement came on a day its monetary policy committee (MPC) kept the repo rate unchanged for the 11th time in a row as retail inflation had ratcheted above its upper tolerance level of 6 per cent in October.

Four members of the interest rate setting panel —Saugata Bhattacharya, Rajiv Ranjan, Michael Debabrata Patra and Das — voted to keep the policy repo rate unchanged at 6.50 per cent.

On the other hand, the two other external members — Nagesh Kumar and Ram Singh — voted to reduce the repo rate by 25 basis points. All of them were in favour of retaining the neutral stance of monetary policy.

RBI governor Shaktikanta Das whose current term ends on December 10 said the CRR cut has been undertaken as liquidity in the banking system — on a deficit mode in recent times — may tighten further in the coming months because of tax outflows and volatility in capital flows.

The CRR reduction will be done in two equal tranches of 25 basis points each with effect from the fortnight beginning December 14, 2024 and December 28, 2024.

``Since the last policy, inflation has been on the upside, while there has been a moderation in growth. Accordingly, the MPC has adopted a prudent and cautious approach in this meeting to wait for better visibility on the growth and inflation outlook. At such a critical juncture, prudence, practicality and timing of decisions become even more critical,’’ Das said.

The MPC meet was preceded by calls for a rate cut by senior central ministers Piyush Goyal and Nirmala Sitharaman.

Das sought to reinforce the RBI’s mandate of controlling inflation and supporting growth. The RBI has to follow the flexible inflation targeting (FIT) framework as provided in the RBI Act, and the apex bank has to maintain CPI inflation at 4 per cent with a room of 2 per cent on either side.

``The Act provides that the RBI that is the MPC is expected to maintain price stability. Infact it is a mandate. The mandate given to RBI is to maintain price stability while keeping in mind the objective of growth," Das said.

"Price stability is important for the people because it affects their purchasing power, it is important for stability for businesses, it is important for exporters and importers. It is important for every segment of the economy.”

He added that at the same time, growth is also very important. ``It is also the effort of the MPC to follow the provision of the law as provided in the RBI Act in letter in spirit’’ he observed.

Das said that the MPC is committed to restoring the balance between inflation and growth which has got ``unsettled’’ recently. He reiterated that the RBI will use policy instruments to restore the inflation- growth balance.

The MPC said food inflation is likely to soften in the fourth quarter with seasonal easing of vegetables prices.