CII and FICCI are expecting a repo rate cut in the next policy statement;
Harsha Vardhan Agarwal, President, FICCI
FinTech BizNews Service
Mumbai, 6 December, 2024: Even as liquidity in the banking system remains adequate, systemic liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows. Shaktikanta Das, Governor, Reserve Bank of India, said while announcing the decisions of the MPC on Friday: “To ease the potential liquidity stress, it has now been decided to reduce the cash reserve ratio (CRR) of all banks to 4.0 per cent of net demand and time liabilities (NDTL) in two equal tranches of 25 bps each with effect from the fortnight beginning December 14, 2024 and December 28, 2024. This will restore the CRR to 4.0 per cent of NDTL, which was prevailing before the commencement of the policy tightening cycle in April 2022. This reduction in the CRR is consistent with the neutral policy stance and would release primary liquidity of about Rs1.16 lakh crore to the banking system."
Liquidity and Financial Market Conditions
System liquidity, as represented by the net position under the Liquidity Adjustment Facility (Net LAF), continued to remain in surplus during October-November28 on account of higher government spending,29 despite a significant increase in currency in circulation during the festive season and capital outflows.30 Given these conditions, the Reserve Bank mainly conducted variable rate reverse repo (VRRR) operations to absorb surplus liquidity.31 To alleviate temporary liquidity tightness because of large GST outflows,32 however, fine-tuning variable rate repo (VRR) operations were conducted intermittently during October and November.33 The two-way liquidity operations of the Reserve Bank ensured close alignment of the inter-bank overnight rate with the policy repo rate.34 Transmission to the credit market has been satisfactory.35
Going forward, the Reserve Bank will continue to be nimble and proactive in its liquidity management operations to ensure that money market interest rates evolve in an orderly manner and the productive requirements of the economy are met.
During 2024-25 (April-November), the Indian rupee (INR) depreciated by 1.3 per cent largely due to pressure from strengthening US Dollar and selling pressure by foreign portfolio investors in October and November. Nevertheless, both the depreciation of the INR and its volatility was less as compared to its EME peers, reflecting India’s strong macroeconomic fundamentals and improvement in external sector outlook.36
The Reserve Bank’s exchange rate policy has remained consistent over the years, and it is market-determined. Its central tenet is to maintain orderliness and stability, without compromising market efficiency. Foreign exchange reserves are deployed judiciously to mitigate undue volatility, maintain market confidence, anchor expectations and preserve overall financial stability. These interventions focus on smoothening excessive and disruptive volatility rather than targeting any specific exchange rate level or band. At the same time, our efforts to deepen and modernise the foreign exchange market have yielded significant results in terms of (i) widening access and participation; and (ii) ensuring efficient price discovery.
Our overall approach ensures that forex reserves act as shock absorbers, safeguarding the economy from external spillovers, while supporting competitive and orderly market conditions. The flexible or market determined exchange rate regime is not merely a tool for managing external shocks; it is an important element of our approach to macroeconomic and financial stability. By combining market discipline with prudent intervention, we have created a system that supports stability, resilience and growth.
Commenting on monetary policy, Mr Harsha Vardhan Agarwal, President, FICCI said, “While the Reserve Bank of India’s stance on the repo rate was widely expected, we welcome 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.”
“On inflation front, the prices are expected to moderate in the latter part of current fiscal year. We look forward to a cut in repo rate in the next policy statement,” added Mr Agarwal.
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.
Chandrajit Banerjee, Director General CII on Monetary Policy (December 2024), explained: “We welcome the 50-bps cut in the cash reserve ratio, as it 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 anticipated easing of inflation, we can expect rate cuts in the foreseeable future.
Further, increasing the collateral free agriculture loans from 1.6 Lakh to 2 Lakh will significantly help in improving the credit flow to agriculture sector thereby providing a strong impetus to the rural economy.
Our forex reserves have been healthy. An increase in interest rate ceilings on FCNR (B) rates by 200 basis points is indeed a positive step as it will help boost the forex reserves further due to inflows of funds from Indian Diaspora.
Governor’s announcement on introduction of new Secured Overnight Rupee Rate (SORR) would build a new interest rate derivative market. This will bring greater transparency and improve credibility of interest rate benchmarks. Besides, this measure would help in enhancing trust of global investors in Indian financial system.
It is noteworthy to see RBI’s collaborative approach towards ensuring inclusive policy formulation. The measures of “setting up a committee of experts to suggest framework for responsible and ethical use of AI” and “setting up RBI podcast” will help in addressing and protecting the interest of customers in financial sector.
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.
With these measures, we anticipate, there would be a better balance between growth and inflation management.”
