RBI's Strategic Move: CRR Cut to Boost Liquidity

The Reserve Bank of India announced a reduction in the cash reserve ratio, aiming to infuse Rs 1.15 lakh crore into the banking system. Governor Das shared inflation forecasts, with CPI inflation projected at 4.8% for FY24-25. India's GDP growth slowed due to manufacturing declines.

In a decisive monetary policy move on Friday, the Reserve Bank of India (RBI) announced a cut in the cash reserve ratio (CRR) for all banks, which will be lowered to 4% of net demand and time liabilities (NDTL) in two steps of 25 basis points each. This adjustment, effective from December 14 and December 28, aims to inject Rs 1.15 lakh crore of liquidity into the banking sector.

RBI Governor Shaktikanta Das outlined inflation forecasts for the upcoming financial years, predicting Consumer Price Index (CPI) inflation at 4.8% for FY24-25. The quarter-wise breakdown anticipates inflation at 5.7% in Q3 and 4.5% in Q4. For FY25-26, CPI inflation is projected at 4.6% in Q1 and 4% in Q2.

Despite recent softening, persistent food price pressures are expected to keep inflation elevated in Q3 of FY24. A robust Rabi season is likely to alleviate food inflation, aided by favorable soil moisture and water reservoir levels. Increasing global rates warrant concern over domestic edible oil prices, amplified by import duty hikes.

India experienced a deceleration in real GDP growth, which slowed to 5.4% in the second quarter of FY24, a sharp decline from anticipated levels. This slowdown was driven primarily by weaker industrial growth, particularly in manufacturing and mining, along with reduced electricity demand.

Specific sectors, including petroleum products, iron and steel, and cement, bore the brunt of manufacturing weakness. However, Governor Das noted signs of recovery in Q2 driven by increased festive demand and an upswing in rural activity as high-frequency indicators suggest a turnaround.

Looking globally, Das emphasized economic resilience in 2024 in the face of mounting challenges, such as the strengthening U.S. dollar and volatile financial markets. However, rising protectionism poses potential risks to global growth and could exacerbate inflation pressures.

The MPC highlighted risks to domestic growth from high inflation, adverse weather conditions, geopolitical uncertainties, and market volatility. Governor Das reiterated the importance of enduring price stability as a basis for strong economic growth, despite concerns over inflation exceeding the 6% threshold in October. The committee remains optimistic that easing food inflation and favorable agricultural production will stabilize prices moving forward.

(With inputs from agencies.)