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India’s central bank left the benchmark interest rate unchanged, while taking steps to boost liquidity in the banking system and stem a decline in the rupee.
The Reserve Bank of India’s monetary policy committee voted four-to-two to keep the repurchase rate at 6.5%, in line with the forecasts. The cash reserve ratio — the proportion of deposits that banks must set aside with the RBI— was lowered by 50 basis points to 4%, to address a potential cash squeeze.
“At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation,” Governor Shaktikanta Das said in a live streamed address in Mumbai. A status quo is “appropriate and essential,” though if growth slowdown lingers beyond a point, “it may need policy support,” he said.
Bonds fell after the RBI’s rate hold, while stocks reversed losses after the CRR cut. The rupee gained as the central bank announced measures to attract foreign inflows by allowing banks to offer higher interest rates to non-resident Indians.
India’s inflation has remained well above the RBI’s 4% target aim, with price gains accelerating to a 14-month high of 6.21% in October. Das had previously stated a rate cut at this stage would be “very risky.”
“Our effort has always been to remain in line with the curve and never fall behind it,” the governor said at the post-policy press briefing Friday.
Volatility in food costs, which make up about half of the inflation basket, will likely keep price gains elevated in the October to December period, Das said.
The central bank raised its inflation forecast for the year through March 2025 to 4.8% from 4.5% earlier, while lowering its growth forecast to 6.6% from 7.2%.
Calls for easing are growing louder after a sharper-than-anticipated dip in the July-September period economic growth to 5.4%. External members of the MPC, Nagesh Kumar and Ram Singh, voted for a quarter-point reduction. Prominent ministers in Prime Minister Narendra Modi’s government, including the finance minister, have called for lower borrowing costs in recent months.
“The policy decision continues to prioritize inflation control over growth rescue,” said Aurodeep Nandi, an economist at Nomura Holdings Inc. “However, there are indications that the policy paradigm could be shifting, which reflects in additional dissent within the MPC and Das’ commentary that the growth outlook warrants monitoring.”
What Bloomberg Economics Says
The central bank’s insistence on keeping rates steady, partly stemming from its overly optimistic growth assessment, is likely to inflict more damage on the economy. We now expect the RBI to deliver a 50-basis-point rate cut in February.
Abhishek Gupta, India economist
— For the full report, click here
Liquidity Boost
Excess liquidity in the banking system dwindled due to the central bank’s forex intervention and is expected to tighten further into mid-December ahead of advance tax outflows.
The CRR was last lowered in 2020. The latest cut would infuse primary liquidity of about 1.16 trillion rupees ($13.7 billion) into the banking system.
The CRR cut before a reduction in repo rate will help in “ensuring effective transmission once the easing begins,” said Anubhuti Sahay, an economist with Standard Chartered Plc. She expects the benchmark rate to be cut in the February meeting.
The central bank’s move to raise interest rates on deposits for Indians living abroad comes as the monetary authority has been using its foreign-currency reserves to slow the pace of the drop in the rupee. The local currency has hit a series of new lows in recent weeks amid rising global headwinds.
“This is a tacit attempt to tap other sources of foreign capital flows, which could give RBI some breathing room and lower its need for forex intervention,” said Madhavi Arora, chief economist, Emkay Global Financial Services.
Next Governor
Das refrained from commenting on his tenure in the policy press conference. His six-year stint at the central bank comes to an end on Dec. 10. Back in 2021, when he was last given an extension, the government had announced it more than a month in advance.
--With assistance from Bhaskar Dutta, Subhadip Sircar and Shwetha Sunil.
(Updates with more details from the briefing in the sixth paragraph)