RBI's CRR Reduction to Foster Economic Growth; Repo Rate Remains Steady, Industry Experts Say
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New Delhi, Dec 6 (NationPress) The RBI's choice to reduce the cash reserve ratio (CRR) by 50 bps is expected to enhance growth following the modification in the GDP outlook for FY25, as stated by industry specialists on Friday.
The Central Bank's monetary policy committee (MPC) has decreased the CRR for banks by 0.5 percent to facilitate greater availability of funds for lending, aimed at stimulating economic development.
The CRR represents the fraction of deposits that banks must hold as reserve cash within the system.
According to Aditi Nayar, Chief Economist at ICRA, "The MPC's resolution to maintain the repo rate was anticipated, especially given that the CPI inflation has surpassed the MPC's upper limit of 6.0 percent. Nevertheless, the CRR cut by 50 bps will contribute to supporting growth after the downward adjustment in the forecast for FY2025."
Nayar further noted, "Should the CPI inflation drop below 5.0 percent by the December 2024 figures, the chances of a repo rate reduction in February 2025 will significantly increase."
The intention behind the CRR cut is to inject additional liquidity into the banking sector, allowing banks to reduce lending rates and boost credit availability, particularly in sectors facing weak demand.
Narinder Wadhwa, Managing Director of SKI Capital, stated, "This action illustrates the central bank's sophisticated strategy in tackling India's economic hurdles, balancing the need for growth stimulation while addressing ongoing inflationary pressures."
Rate-sensitive sectors such as real estate, automobiles, and consumer durables are likely to benefit from the CRR reduction through lowered borrowing costs and improved liquidity.
However, experts warn that the RBI must remain vigilant to prevent excessive liquidity, which could incite asset bubbles or speculative behavior in inflated markets.
The policy decision indicates the RBI's commitment to a measured approach, utilizing liquidity strategies to bolster growth while keeping a watchful eye on inflation and fiscal responsibility.
Dr. Samantak Das, Chief Economist and Head-Research and REIS, India, JLL, remarked that the RBI's decision to hold the repo rate steady for the 11th consecutive time signifies a wise monetary policy approach with a primary focus on achieving sustainable disinflation.
"Inflation tends to be seasonal and is anticipated to decrease in the upcoming quarter, indicating potential for future rate reductions," he added.
By maintaining the repo rate at 6.5 percent and executing a 50 bps CRR cut to 4 percent, the central bank has injected Rs 1.16 lakh crore into the banking system.
Arsh Mogre, Economist Institutional Equities at PL Capital - Prabhudas Lilladher, stated, "The RBI's MPC decision in December showcases a careful balance between tackling domestic liquidity issues and managing external risks."
