RBI keeps repo rate unchanged: A policy addressing market microstructure

The Monetary Policy Committee (MPC) kept the rates and policy stance unchanged.

 

The MPC reiterated its commitment to restoring the balance between inflation and growth in the overall interest of the economy.

 

The cut in cash reserve ratio (CRR) was not a part of the policy document.

 

The policy has some key takeaways. The real gross domestic product (GDP) forecast for FY25 has now been revised to 6.6 per cent.

 

This downward revision is nothing new as the Reserve Bank of India’s (RBI’s) growth projections in FY22 and FY23 were revised downwards in October on an average by 90 basis points (bps).

 

At this rate, the 6.6 per cent growth projections by RBI look to be higher than consensus.

 

On the inflation front, food inflation is likely to soften in Q4 with seasonal easing of vegetables prices and kharif harvest arrivals.

 

However, the overall outlook emphasises that near-term inflation and growth outcomes in India have turned somewhat adverse since the October policy.

 

Consumer price index (CPI) inflation for 2024-25 is now projected at 4.8 per cent. 

On the development and regulatory policy side, the coverage has been very wide, touching upon banking, financial markets and policy communications.

 

On the banking side, first and foremost is the 50-bps cut in CRR. The proposed measure restores the CRR at April 2022 but not March 2020 at 3 per cent. The measure is positive for banks as it immediately impacts the overall cost of funds and lendable resources.

 

To be fair to RBI, liquidity in the banking system has been adversely impacted with the implementation of SNA Sparsh and the CRR move could be the beginning of a series of liquidity measures to counter this.

 

Government cash balances, a counter cyclical measure to address systemic liquidity, has entered a new phase with the launch of SNA Sparsh.

 

SNA Sparsh completely eliminates the role of commercial banks, as central ministries and state treasuries are now integrated on RBI’s eKuber platform using IFMIS (Rs 3.7 trillion in FY25 already migrated).

 

Thus, the concept of core liquidity has now lost its relevance and what is important is systemic liquidity that has been just positive in FY25.

 

The proposal on SORR is expected to give further boost to derivatives markets and provide an additional input for banks to price loans, if necessary.

 

The loan limit has been raised keeping in mind the inflation in agriculture inputs. The present hike appears to be a routine exercise.

 

On the digital banking side, the RBI has proposed to constitute a committee to develop a Framework for Responsible and Ethical Enablement of artificial intelligence (AI). Similar standards on ethical AI have been adopted in jurisdictions such as in Singapore.

 

The objective is to provide firms having financial products and services with a set of foundational principles to consider when using AI in decision making and promote public confidence and trust in the use of AI.

 

In a similar vein, the use of technology to detect mule accounts is also timely to prevent misuse of banking channels for money laundering.

 

On the communications side, RBI has expanded its policy consultation process through Connect 2 Regulate.

 

The measure will be open to all including scholars for directly

 

sharing suggestions and ideas with RBI, making the financial regulation process more democratic and participatory. RBI will also use podcast for wider information dissemination.

 

In all, the policy has travelled considerable space in addressing the emerging issues in financial services.

 

We hope the next policy announcement will make a concrete move on rates. 

 

(The author is Member 16th Finance Commission and Group Chief Economic Advisor, State Bank of India. Views are personal)