RBI Eases Liquidity to Support Slowing Economy without Changing its Benchmark Rate

 

The Reserve Bank of India (RBI) maintained its benchmark interest rate at 6.50% today, December 6, marking the eleventh consecutive meeting without a rate change. However, the RBI cut the cash reserve ratio (CRR) by 50 basis points to 4%, a move aimed at easing liquidity conditions and supporting the economy amidst slowing growth. This CRR cut, effective in two stages in December, will inject $13.72 billion into the banking system.

 

India’s GDP growth unexpectedly slowed to 5.4% in the July-September quarter, its weakest in seven quarters, while inflation has risen and the rupee has fallen to record lows. Despite these challenges, RBI Governor Shaktikanta Das expressed confidence in India’s economic resilience though he acknowledged that policy support may be necessary if the slowdown persists.

 

The RBI also raised its inflation forecast to 4.8% for the year, up from 4.5%, due to rising food inflation. Annual retail inflation hit 6.21% in October, breaching the RBI’s tolerance band. Meanwhile, the central bank lowered its growth forecast for the year to 6.6%, down from 7.2%, following weaker-than-expected Q2 growth.

 

To bolster the rupee, which has been under pressure due to a stronger dollar and capital outflows, the RBI raised the interest rate ceiling for foreign currency non-resident (FCNR-B) deposits. Despite these measures, the RBI remains cautious, with a potential rate cut in February contingent on further economic data.

 

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