Context:
The monetary policy committee (MPC) of Reserve Bank of India (RBI) on Friday took a decision to keep the policy repo rate unchanged at 6.5 per cent-the status quo for an 11th straight time.
Key Highlights:
- On one hand, it reduced CRR or cash reserve ratio for 50 basis point to 4 per cent to increase the liquidity in the system and on the other hand lower its GDP projection for 2024-25 to 6.6 percent from 7.2 percent.
- This year’s inflation projection was raised by 30 bps to 4.8 percent.
- Repo rate means the rate at which RBI lends to commercial banks and CRR is percentage of deposits that banks have to keep with the central bank.
- One basis point is equal to one hundredth of a percentage point.
Food prices, which have driven up headline retail inflation in recent months, are expected to cool off in the January-March quarter, which might present a case for reducing rates in the next review of policy in February.
Cuts Cash Reserve Ratio reduces to 4 Percent
- The monetary policy committee of the Reserve Bank of India cut the cash reserve ratio (CRR) by 50 basis points to 4%.
- This cut will be made in two rounds of 25 basis points each, and will free up over ₹1.16 lakh crore from cash balances.
Reason Behind the CRR Cut
- The least expensive measure considering the issues on the timing and window of conventional rate cuts and foreign exchange costs was this CRR cut.
Benefit from CRR Cut
- The CRR would return to 4% of net demand and time liabilities. This would be the status prior to the policy tightening cycle that was begun in April 2022.
- Benefits are likely to flow from Q4FY25 and should be accretive to the NIM and return on assets for banks.
- This reduction is likely to benefit banks, especially those having a lesser exposure of loans linked to the marginal cost of funds based lending rate.
- Real estate firms hoped the banks would step up lending to the sector and ease liquidity after the RBI cut the cash reserve ratio.
RBI Revision of Ceiling on Interest Rate for NRI FCNR (B) Deposits
- RBI raised the interest rate ceiling for NRI FCNR (B) deposits to absorb the pressure of capital outlays from the domestic currency.
- For the remaining time in the fiscal year, banks will pay their customers up to a maximum of 500 bps over the alternate reference rate or ARR from the existing 250 bps.
RBI to Enhance FCNR(B) Interest Rates for Deposits.
- The foreign capital inflows shall increase because of the foreign currency non-resident bank deposits (FCNR(B)) under which the excess interest rates would be charged by the Reserve Bank of India.
- Global market cooling forced the domestic banks to go to outer limits for collecting funds from international investors understating a competitive rate.
The relaxation of interest rates available up to March 31, 2025, have been offered for FCNR(B) deposits. - The reposel over overnight ARR for the respective currency/swap and 250 basis points for deposits of 1 year to below 3 years maturity.
- This is meant to foster another route through which banks will be able to source funds, to make possible an increase in dollars inflow and offer limited protection to rupee.
- As on April September 2024 $5.34 billion went into FCNR(B) accounts compared to $1.92 billion in the same period the previous year.
Detailed report of the meeting:
– No Change in Policy Rates: After the end of the 11th successive meeting, the RBI’s rate-setting panel decided to keep the repo rate constant at 6.5%.
– CRR Reduced: The CRR for the banks has reduced from 4.5% to 4% in two tranches. The reason is that this is now expected to make the banks easily accessible to liquidity as the RBI anticipates liquidity becoming tight in the coming days. – Forecasts For GDP Growth and Inflation – “GDP growth projection” has been tapered down from 7.2% to 6.6% for FY25. -Inflation projection was increased to 4.8% from 4.5%.
– Inflation Risks: High inflation, according to RBI Governor Shaktikanta Das, erodes the ability of consumers to purchase and therefore adversely affects both consumption and investment demand leading to negative growth.
– MPC Voting:
– Four MPC members voted to maintain the repo rate at 6.5%.
– The other two external members, i.e. Nagesh Kumar and Ram Singh, preferred a 25 basis point rate cut.
– Focus on Inflation Control: RBI stressed its commitment towards aligning inflation with its target and fighting the price spiral. The MPC remains focused on ensuring sustainable inflation control so that it can support long-term growth. -MPC Stand: All Six MPC Members Agreed on a Neutral Stand To Leave the RBI with Its Arm and Leg Because Consideration of Future Inflation Trends Would Derive Yet More Appropriate Cuts or Hikes. -Liquidity BoostThis will infuse INR 1.16 lakh crore into the banking system, which is expected to enable banks to lend more and hence improve their margins.
-Increased Ceiling Interest Rates on the FCNR(B) Depo
