CRR Cut Will Help Infuse Liquidity And Pave The Way For Rate Cut

A cash reserve ratio cut of 50bps as a measure to bring it to the pre-Covid level of four per cent will help infuse liquidity to the tune of Rs. 1.2 trillion into the system and pave the way for future rate cut. It has happened amid perplexing policy trade-offs led by the country's stag-flationary state, challenges around timing and window of conventional rate cuts, and foreign exchange cost of rate cuts. While liquidity infusion gives some cushion when core liquidity may steadily move to a deficit ahead with unsterilized forex intervention and core investment company leakages, this could pave the way for future rate cuts. Going ahead, as per Emkay, the pressure for conventional easing will mount as growth looks structurally pale. However, the depth and timing of rate cuts would still be a tricky call, given the fluid global dynamics and re-emergence of the risk of ‘high for long’ scenario and rising global-term premium.

Experts do see a cut in February, but would be more comfortable taking a firm call closer to the policy window. The move to incentivize foreign currency from non-resident borrowings also reflects how the Reserve Bank of India (RBI) is weighing the cost of heavy forex intervention in the past couple of months and skewness in the forward premia, while having limited conviction on steady FPI inflows ahead. Analysts also keep a watch on unconventional easing measures, specifically, the gradual easing of regulatory lending norms ahead in order to re-spur waning credit off-take. This liquidity infusion would also lead to better and immediate transmission of cuts, as and when the RBI commences its cut cycle amid the limited window. Had there been no policy support, the system liquidity deficit would likely have crossed Rs. 3-3.5 trillion by end of the current fiscal as per an estimate.

The MPC kept the repo rate unchanged at 6.5 per cent, as expected, albeit with a 4-2 vote split, while the stance was also unchanged with a unanimous vote. The slower growth trajectory was acknowledged with the GDP growth forecast for the year being reduced to 6.6 per cent, while the inflation estimate was adjusted higher to 4.8 per cent. There was optimism, however, that the growth-inflation balance would be restored in H2 and beyond, with economic activity improving and inflation, especially for food, moderating. Even as inflation is likely to ease to sub-five per cent by end of March, it is far from the four per cent durability the RBI has been seeking in order to avoid any feedback loop to generalized inflation. RBI Governor Shaktikanta Das has been reiterating that price stability was essential for a sustained growth, while acknowledging that a continued growth slowdown may need policy support. A rate cut could further put downward pressure on INR, at a time when the central bank is already intervening heavily in spot, forward, and NDF market in the last few months.