RBI's credit policy seeks to strike balance between inflation, growth: Experts

Mumbai: The Reserve Bank's credit policy seeks to strike a balance between keeping a check on inflation and encouraging sustained growth, experts opined on Friday as they emphasised that a lower cash reserve ratio requirement is a big positive amid mixed economic signals.

The RBI on Friday kept its key interest rate unchanged citing inflation risks, but cut the Cash Reserve Ratio that banks are required to park with the central bank, boosting money with lenders to support a slowing economy.

Harsha Vardhan Agarwal, President at FICCI, said that while the RBI's stance on the repo rate was widely expected, the industry body welcomes the 50-bps cut in the CRR rate.

"This move is well-timed and practical and should help ease out the liquidity situation supporting credit and overall growth," he said.

Agarwal further said food prices have been driving the current spurt in prices and a seasonal correction is on anvil.

"It is pertinent to ensure a seamless supply-side framework through better planning, logistics and distribution management of food items leveraging careful monitoring of production data," he added.

Welcoming the reduction in CRR, Chandrajit Banerjee, Director General of CII, said the decision will help ensure the availability of additional resources for all productive sectors of the economy, especially in anticipation of a near-term tightening of systemic liquidity.

"This was a specific CII ask along with a request for moderation in headline interest rates. However, we draw satisfaction from the overall statement that the neutral stance has been maintained and with the anticipated easing of inflation, we can expect rate cuts in the foreseeable future," he said.

Banerjee further said the measure to introduce Mulehunter.AI to hunt for mule accounts will help reduce frauds in digital space and thus improve confidence amongst end users as well as service providers to promote digital financial transactions.

Secretary General of another industry chamber Assocham Deepak Sood said while the downward GDP growth projection at 6.6 per cent for the current fiscal is realistic, the growth trajectory would normalise above 7 per cent from the fourth quarter of 2024-25 into the next financial year.

"We agree with RBI Governor Shaktikanta Das's assessment that the slowdown in economic activity has bottomed out," Sood said.

Madan Sabnavis, Chief Economist at Bank of Baroda, said the RBI has also raised the flag that core inflation can increase as several manufactured and service industry products have witnessed increases in costs and hence prices.

However, given a more benign forecast of 4.5 per cent inflation for the fourth quarter, there is a good chance of a reduction in the repo rate in the next policy.

"The market reaction in terms of bond yields and stock indices have been largely neutral to these announcements. We can expect an impact on yields once the CRR funds get released in the market," Sabnavis said.

Aditi Nayar, Chief Economist at ICRA, said the decision of the Monetary Policy Committee (MPC) was along expected lines, with the CPI inflation exceeding the MPC's upper threshold of 6 per cent.

"However, the cut in the CRR by 50 bps would help support growth, after the sharp downward revision in the forecast for FY2025. If the CPI inflation retraces to below 5 per cent by the December 2024 print, the likelihood of a repo cut in February 2025 will rise sharply," she said.

Hemant Jain, President at PHDCCI, said the calibrated steps undertaken by RBI to cut CRR significantly from 4.5 per cent to 4 per cent will not only enhance the liquidity in the economy but also boost business sentiments as it signifies the futuristic softening of interest rates in the country.

"The forward-looking guidance provided by RBI underscores its dedication to maintaining transparency and predictability in monetary policy," Jain said.

The Reserve Bank on Friday slashed Cash Reserve Ratio (CRR) by 50 basis points to 4 per cent, a move that would unlock Rs 1.16 lakh crore bank funds to ease the potential liquidity stress.

To attract more capital inflows, the RBI also announced to increase the interest rate ceilings on FCNR(B) deposits.

Mandar Pitale, Treasury Head at SBM Bank India, said though the increase in ceiling on FCNR deposit interest rates will have a sentimental impact, an actual incremental influx of dollars needs to be watched, as the banks present USD FCNR rates way below the present ceilings available.

Hitting the revised upward ceiling will increase the covered cost of funds through the FCNR route significantly adding the impact due to the recent surge in forward premium induced by large rupee volatility, Pitale said.

Rohit Arora, CEO and Co-founder of Biz2Credit and Biz2X, said the RBI's balanced focus on inflation control and growth aligns well with the fintech ecosystem, enabling to innovate and deploy technology that simplifies credit access and strengthens financial inclusion.

"However, with inflationary pressures persisting, particularly from food prices, it's crucial for the fintech sector to leverage data analytics and AI to assist lenders in proactive risk assessment and portfolio management, ensuring resilience in the credit landscape," Arora said.

Arsh Mogre, Economist Institutional Equities at PL Capital - Prabhudas Lilladher, said the RBI's December MPC decision reflects a delicate balancing act between addressing domestic liquidity challenges and managing external vulnerabilities.

"The policy moves are clear but cautious -- indicating readiness for incremental easing from February 2025 provided inflationary pressures abate and external conditions stabilise. This measured approach underscores the RBI's focus on preserving economic stability while navigating an increasingly uncertain global landscape," he said.

Sandeep Bagla, CEO of Trust Mutual Fund, said there is pressure on the rupee from sustained FPI selling in equities. Any rate cuts would weaken the rupee as well.

"RBI is likely to reduce rates in February policy, once inflation starts easing again. Two out of 6 MPC members voted for a rate cut, which shows that the possibility of a rate cut in February is very high," Bagla added.

The next monetary policy meeting of the Reserve Bank is scheduled for February 2025.