RBI’s Credit Policy On Expected Lines, CRR Cut To Support Growth: Experts

Mumbai: The Reserve Bank’s credit policy was on expected lines, and the reduction in the cash reserve ratio (CRR) would help support growth, after the sharp downward revision in the forecast for the current financial year, opined experts.

The RBI on Friday kept its key interest rate unchanged citing inflation risks, but cut the Cash Reserve Ratio that banks are required to park with the central bank, boosting money with lenders to support a slowing economy. Harsha Vardhan Agarwal, President, FICCI, said that while the RBI’s stance on the repo rate was widely expected, the industry body welcomes the 50-bps cut in the CRR rate.

“This move is well-timed and practical and should help ease out the liquidity situation supporting credit and overall growth,” he said. Agarwal further said food prices have been driving the current spurt in prices and a seasonal correction is on anvil. “It is pertinent to ensure a seamless supply side framework through better planning, logistics and distribution management of food items leveraging careful monitoring of production data,” he added.

Welcoming the reduction in CRR, Chandrajit Banerjee, Director General of CII, said the decision will help ensure the availability of additional resources for all productive sectors of the economy, especially in anticipation of a near-term tightening of systemic liquidity. “This was a specific CII ask along with a request for moderation in headline interest rates.

However, we draw satisfaction from the overall statement that the neutral stance has been maintained and with anticipated easing of inflation, we can expect rate cuts in the foreseeable future,” he said. Banerjee further said the measure to introduce mulehunter.AI to hunt for mule accounts will help reduce frauds in digital space and thus improve confidence amongst end users as well as service providers to promote digital financial transactions. Madan Sabnavis, Chief Economist, Bank of Baroda, said the RBI has also raised the flag that core inflation can increase as several manufactured and service industry products have witnessed increase in costs and hence prices. “It will not only enhance the liquidity in the economy but also boost business sentiments as it signifies the futuristic softening of interest rates in the country,” PHDCCI President Hemant Jain said.

However, given a more benign forecast of 4.5 per cent inflation for the fourth quarter, there is a good chance of a reduction in repo rate in the next policy. “The market reaction in terms of bond yields and stock indices have been largely neutral to these announcements. We can expect an impact on yields once the CRR funds get released in the market,” Sabnavis said. Aditi Nayar, Chief Economist, ICRA, too said the decision of the Monetary Policy Committee (MPC) was along expected lines, with the CPI inflation exceeding the MPC’s upper threshold of 6 per cent.

“However, the cut in the CRR by 50 bps would help support growth, after the sharp downward revision in the forecast for FY2025. If the CPI inflation retraces to below 5 per cent by the December 2024 print, the likelihood of a repo cut in Feb 2025 will rise sharply,” she said. Hemant Jain, President, PHDCCI, said the calibrated steps undertaken by RBI to cut CRR significantly from 4.5 per cent to 4 per cent will not only enhance the liquidity in the economy but also boost business sentiments as it signifies the futuristic softening of interest rates in the country.

“The forward looking guidance provided by RBI underscores its dedication to maintaining transparency and predictability in monetary policy,” Jain said. The Reserve Bank on Friday slashed Cash Reserve Ratio (CRR) by 50 basis points to 4 per cent, a move that would unlock Rs1.16 lakh crore bank funds to ease the potential liquidity stress. In order to attract more capital inflows, the RBI also announced to increase the interest rate ceilings on FCNR(B) deposits. Mandar Pitale, Head Treasury, SBM Bank India, said though the increase in ceiling on FCNR deposit interest rates will have sentimental impact, an actual incremental influx of dollars needs to be watched, as the banks present USD FCNR rates way below the present ceilings available.