MPC meeting: Interest rates to remain unchanged, CRR cut to ease liquidity pain

MUMBAI: The central bank’s rate-setting committee on Friday kept the policy rate unchanged for the 11th consecutive review meeting, but lowered the reserve requirement. This could ease borrowing costs and open room for an easing cycle to begin at the next meeting. The cap on US dollar deposit interest rates was temporarily lifted as the rupee weakened due to outflows from portfolio investors.

Expecting liquidity to tighten in the coming months, the cash reserve ratio (CRR) has been lowered by 0.5 points to 4% in two tranches.

Reserve Bank of India (RBI) Governor Shaktikanta Das announced the final policy review of his second term, lowering his gross domestic product (GDP) growth forecast for FY2025 to 6.6% from 7.2%, while forecasting inflation. increased from 4.5% to 4.8%. %.

He said short-term inflation and growth outcomes had turned slightly unfavorable since the October policy. “Sustained high inflation reduces consumer purchasing power, negatively impacting both consumption and investment demand,” Das said in a policy statement. “Focus on sustained adjustment of inflation”
“The overall impact of these factors on growth is negative,” the central bank governor said. Four out of six members of the Monetary Policy Committee (MPC) voted to keep the repo rate unchanged at 6.5%, while external members Nagesh Kumar and Ram Singh voted to cut the rate by 25 basis points. At the October review meeting, the decision to maintain interest rates as is was supported by a 5-1 vote. One basis point is one-hundredth of a percentage point.

While acknowledging the recent challenges that have prompted a more cautious estimate of FY25 growth, the MPC noted that the Committee is “clearly committed to persistent alignment of targets with inflation” to underline its determination to win the fight against price spirals. “We have decided to continue to focus on

The governor’s second term ends on December 10, but the government has not yet announced term extensions for the incumbent or his successor.

liquidity lever
All six MPC members have voted to remain neutral on policy, which gives the RBI flexibility to lower or raise interest rates “according to the evolving trajectory of inflation.”

In a post-monetary media interaction, Das said the central bank will use various policy tools to create conditions to restore the balance between inflation and growth. The reduction in CRR will inject Rs 1.16 billion into the banking system, boosting banks’ profit margins and allowing them to lend more. Banks do not receive interest on deposits kept with RBI as CRR.

Separately, the central bank also raised the interest rate cap on FCNR (B) (Foreign Currency Non-Resident Bank) deposits to attract dollar deposits and stem the rupee’s depreciation, which has fallen 1.3% since the beginning of this fiscal year.

BSE Sensex ended almost flat at 81,709 and NSE Nifty50 also ended flat at 24,677. The rupee hit a high of 84.53 rupees to the dollar and closed at 84.69 rupees. Thursday’s closing price was 84.73. Government bond yields rose 6 basis points to 6.74%.

balancing growth and inflation
Headline inflation was well above the central bank’s 4% target in the last two readings, in September and October, but growth in the second quarter was 5.4%, below the expected 7%. “A rise in inflation reduces disposable income in the hands of consumers, puts pressure on personal consumption, and has a negative impact on real GDP growth,” Das said.

Anubhuti Sahai, India economist at Standard Chartered Bank, predicted that the repo rate would be cut by 25 basis points in February and April. It also helps in proper ordering,” he added. I’ve been trying. ”

Regarding the decision to maintain the policy rate, the RBI’s policy statement said the MPC is focused on permanently bringing inflation down to within legally mandated limits “while supporting growth”.