The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has concluded its 3-day meeting. Central bank governor Shaktikanta Das kept key rates unchanged while retaining the repo rate at 6.50% and the CRR has now been reduced by 50 bps to 4%.
The RBI said that maintaining price stability is a key factor. He said that it is important for the economy to maintain macroeconomic stability and build buffers. India is well positioned to benefit from emerging trends globally. The RBI has lowered FY25 growth forecast to 6.6% and expects full-year inflation to be around 4.8%.
Inflation has risen above the upper level of the tolerance band due to a jump in food prices. The RBI expects seasonal food improvement to moderate inflation in Q3.
Geopolitical situation, market volatility and geopolitical conditions are key points of concern for the economy and pose risks to inflation. Due to the liquidity crunch, RBI announced a 50 basis point cut in CRR, the first since March 2020, which will be reduced in two tranches of 25 basis points each.
While liquidity crunch remains, given the focus on inflation control, this measure may prolong the process of bringing inflation under control, unless the arrival of the new agricultural crop results in a sharp fall in prices or growth remains slow.
Equity markets got what they wanted and hence have taken the policy outcome in their stride. Near term moves in the markets may depend on foreign flows until Indian macro and micro show sustained improvement.”
“The RBI Governor’s statement to the latest MPC highlights the growing dilemma on the growth-inflation balance amid stable headline inflation and the slowdown in growth seen in Q2.
As expected, the MPC has attempted to address this by cutting CRR by 50 basis points while maintaining status quo on benchmark rates. More liquidity in the system will soften short-term interest rates and may ease pressure on bank deposit rates. RBI had to revise its forecasts on growth and inflation given the latest data prints.
GDP growth has declined significantly from 7.2% earlier to 6.6%, which is still 20 bps higher than our revised forecast of 6.4%. Given the slow decline in food inflation in the current quarter, RBI has also revised its average inflation forecast to 4.8% from 4.5%, which is about 1% higher than the target level.”