In the latest MPC review concluded on 6th December, the Monetary Policy Committee(MPC) decided to keep the repo rate unchanged but reduced the CRR(Cash Reserve Ratio) by 50basis points (bps) to 4% from 4.5% in a bid to boost liquidity in the financial system.
“CRR is the percentage of a bank’s total deposits that it is required to maintain in liquid cash with the RBI as a reserve.”
This is the eleventh consecutive monetary policy, over 22 months, which has left the Repo rate unchanged.
Significantly, the policy panel cut the GDP growth estimate to 6.6% in FY2025 from 7.2% projected earlier, and raised the retail inflation forecast to 4.8% for the current fiscal from 4.5% projected earlier.
Why was CRR cut?
The decision to cut CRR by 50 bps will free up Rs 1.16 lakh crore to the banking system, augmenting the lendable resources of banks.
The liquidity in the banking system has tightened because of the RBI’s actions to stabilise the rupee. There have been a lot of dollar sales (by the RBI), which has affected the overall liquidity in the system. In December, liquidity will further tighten due to outflows related to payment of advance tax, goods and services tax (GST), and quarter-end demand for credit.
The surplus liquidity can be used by banks for lending, which is expected to help in spurring economic growth. “A CRR cut will free up bank money, which can further be deployed for lending. There is a chance that banks may pass on the benefits of this CRR cut to borrowers.
What about the decision to keep the Repo rate unchanged?
The 4-2 decision to keep the Repo rate unchanged indicates that there are differences of opinion in the policy panel about the way forward in the wake of the slowdown in the economy.
RBI Governor Shaktikanta Das flagged the persistent food inflation in his explanation for the majority decision.
“Food inflation pressure is likely to linger in Q3 of FY25 and start easing in Q4 of FY25. High inflation reduces disposable income in the hands of consumers. MPC believes that only with durable price stability, we secure strong foundation for high growth,” he said.
Over the last two months, two Union Ministers have called for a cut in the Repo rate.
How are ordinary borrowers likely to be impacted by the RBI MPC’s decision?
With the RBI leaving the Repo rate steady at 6.5%, all external benchmark lending rates (EBLR) linked to the Repo rate will not increase, giving relief to borrowers as their equated monthly instalments (EMIs) will not increase.
However, the cut in CRR is likely to reduce the deposit rates marginally as the liquidity will increase in the banking system.
Lenders (banks and financial institutions) may raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of a 250-bps hike in the Repo rate between May 2022 and February 2023 has not happened.
In response to the 250-bps hike in the policy Repo rate since May 2022, banks have revised upwards their Repo-linked external benchmark-based lending rates (EBLRs) by a similar magnitude.
The median 1-year marginal cost of funds-based lending rate (MCLR) of scheduled commercial banks has increased by 170 bps during May 2022 to October 2024.
Why has the MPC reduced the growth forecast for the economy?
The MPC has reduced the GDP growth forecast to 6.6% from 7.2% in the wake of the slowdown in the economy in the second quarter.
In the October, August, and June MPC announcements, the RBI had retained the GDP growth estimate for 2024-25 at 7.2%, with slight variations in the quarterly growths.
The slowdown bottomed out in the second quarter, and has since then recovered – driven by festive demand and rural consumption, Governor Das said.
The recent data released by the National Statistics Office (NSO) showed that the country’s real gross domestic product (GDP) slumped to a seven-quarter low of 5.4% in July-September 2024. This compares with a growth of 6.7% in the April-June 2024 quarter and 8.1% in the July-September 2023 period.
And what did the MPC say on inflation – and why?
The policy panel has hiked the inflation estimate for FY25 to 4.8% for the current fiscal from 4.5% projected earlier.
Consumer price-based inflation (CPI), or retail inflation, surged to a 14-month high of 6.21% in October 2024, compared to 5.5% in September.
The MPC had maintained a cautious posture, highlighting limited room to cut rates in the face of above-target inflation. The inflation level has remained much above the RBI’s tolerance level.