RBI MPC Policy: CII bats for 25 basis points Repo Rate Cut by RBI on Fri
Reserve Bank of India (RBI) should cut the key repo rate by 25 basis points in its forthcoming monetary policy meeting scheduled for December 6, apart from taking a host of liquidity enhancing measures, Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII) has said.
A policy rate cut would lower borrowing costs, spur private capex revival and reinvigorate consumption, thereby providing much-needed support to India’s growth trajectory, Banerjee said in a statement.
The liquidity measures have been advocated in the form of conducting Open Market Operations (OMOs) and effecting a cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR) cut.
The slowdown in India’s economic momentum, with real GDP growth moderating to a seven-quarter low of 5.4 per cent in Q2 FY25 from 6.7 per cent in the previous quarter, underscores the need for an interest rate cut by the RBI, according to Banerjee.
Even though CPI inflation has been running high, it is primarily driven by rising food prices which have played a disproportionately high role in pushing the overall headline print, he said.
Theoretically, high interest rates are known to have a weak impact on taming food prices.
The weight of food in CPI basket stands at 39.06 per cent which is among the highest globally and these weights have not been revised since 2011-12.
CII has also called for an urgent revision in the weights in the CPI basket in line with the latest consumption survey weights. This is something which the RBI could take up with the government as it makes the entire rate setting exercise cumbersome, CII has said.
Moreover, with inflation expected to ease in the coming months, supported by favourable harvests and ample food grain buffer stocks, RBI has the window to consider policy rate cut, Banerjee noted.
In addition, to support the ongoing growth recovery process and provide adequate resources to all productive sectors of the economy, it is critical to deploy measures to improve the banking system liquidity.
Durable system liquidity surplus in the banking system has moderated sharply to an average of ₹3200 crore in the last week of November from ₹84,000 crore in the week before, amid FPI outflows and rise in currency demand.
To inject durable liquidity into the banking system, CII has come up with three suggestions that could be considered.
First, is to conduct open market operations (OMOs)/Variable Repo Rate (VRR) auctions so that additional liquidity is infused into the system.
Second, consider a calibrated reduction in SLR from current 18 per cent by 25 basis points every calendar quarter until it reaches 17 per cent of the net demand and time liabilities (NDTL). The first reduction in SLR should start from January 2025 and will continue for the next one year.
It is a well-known fact that the actual SLR has always been higher than the mandated requirement. The current SLR in the banking system is above 27 per cent as of October 2024 as compared to the mandated requirement of 18 per cent. To preclude this problem, it is also suggested that in addition to cutting the SLR, a cap is put on it so that the banks are allowed to park only up to 2 per cent higher than the prescribed rate. This will help in freeing up more resources for the private sector and address the problem of crowding out of private borrowing by large government borrowings, CII has said.
Third, however, as all banks already carry surplus SLR over the required 18 per cent on their books, it is suggested that the cut in SLR be supplemented by reducing the CRR by 50 basis points which will help to free-up banks cash for lending purposes especially to the small & medium businesses through infusing base money into the system. Currently, CRR is at 4.50 per cent and is higher than the pre-COVID levels of 4.0 per cent.