Mumbai (Maharashtra) [India]: As the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) deliberates its policy stance, experts predict a focus on liquidity measures rather than an outright cut in the policy repo rate. The committee is set to announce its decision on Friday, December 6.
Balancing Growth and Inflation
The MPC faces a dual challenge:
- Economic Slowdown: Growth has been slowing faster than anticipated, increasing the urgency for monetary easing.
- Elevated Inflation: Headline inflation, driven largely by food prices, remains high but has shown signs of easing at the wholesale level.
M Govind Rao, Member of the 14th Finance Commission, highlighted the delicate balance the MPC must achieve:
“The expectation is that they will continue the status quo on the policy rate, but may reduce the CRR marginally to ensure adequate liquidity.”
Potential CRR Reduction
Economists suggest the MPC might consider a Cash Reserve Ratio (CRR) reduction as a cautious alternative to a repo rate cut. A CRR cut would free up more funds for banks to lend, bolstering liquidity without directly impacting inflation.
Ankita Pathak, Chief Macro and Global Strategist at Ionic Wealth, noted:
“The economy is slowing much faster than anticipated, and inflation concerns are primarily driven by food prices, which have shown signs of easing at mandis recently.”
Industry Demands
Industry representatives have called for aggressive measures, including:
- A 25-basis point repo rate cut to lower borrowing costs.
- Liquidity-enhancing actions like Open Market Operations (OMOs) and reductions in CRR and Statutory Liquidity Ratio (SLR).
Chandranjit Banerjee, Director General of the Confederation of Indian Industry (CII), urged:
“The Reserve Bank of India should cut the key repo rate by 25 basis points in its forthcoming monetary policy meeting, apart from taking a host of liquidity-enhancing measures.”
Cautious Approach Expected
While a repo rate cut would directly support economic growth, a CRR cut could offer a more measured way to infuse liquidity without adding inflationary pressures. The MPC’s decision will reflect its strategy to navigate these competing priorities effectively.
Market and Industry Outlook:
- Investors and businesses are keenly awaiting the MPC’s decision, with expectations that a balanced approach will provide clarity on the central bank’s monetary policy trajectory.
- The RBI’s decision on December 6 will likely set the tone for its approach to managing India’s economic slowdown while maintaining inflation control.