ECONOMYNEXT – The Reserve Bank of India has cut its policy rate by 25 basis points to 6.0 percent on ‘growth-inflation dynamics’ despite consumer price growth being above its 4.0 percent target and the rupee still under pressure.
“Considering the existing growth-inflation dynamics… a less restrictive monetary policy is more appropriate at the current juncture,” RBI Governor Sanjay Malhotra was quoted as saying by the AFP news agency in his first monetary policy review.
Inflation in December was 5.22 percent.
His predecessor Shaktikanta Das, has hiked rates 2.5 percentage points between May 2022 and February 2023. The had bank last cut them in May 2020 amid the Covid pandemic.
RBI has intervened in forex markets to stop a slide in the rupees, thought Governor Malhotra said the RBI was not targeting a “specific level” and the exchange rate was “market determined”.
The RBI’s decision comes after government unveiled income tax cuts in its annual budget, also to boost growth.
India’s economy grew 5.4 percent in the September quarter, its worst performance in seven quarters and lower than analyst expectations of 6.5 percent.
The RBI foreign reserves had risen in the two weeks ending January 31, reports said but the rupee continued to slide amid interventions in February triggering liquidity shortages.
The RBI has large reserves amounting to about 10 months of imports, allowing it to intervene and wait for domestic credit to slowdown from a liquidity short.
The central banks reserves had come down from around 700 billion rupees in September 2024 to around 630 billion by end January.
Excess liquidity was 4.6 trillion rupees in September, 27, 2024, when interventions began.
By January 19, liquidity was minus 0.8 trillion amid injections, Gaura Sen Gupta Chief Economist, IDFC First Bank, Economist Unit said in an analysis on Business Standard.
A cut in the reserve ratio released 1.16 trillion and open market operations had injected 600 billion rupees. Liquidity was also temporarily injected through buy sell swaps.
Injections of money allows banks to lend without deposits, worsening imports and pressure on the currency of a reserve collecting central bank.
On Friday (7 February), the Indian rupee was quoted at 87.43 to the US dollar, a fall of 1 percent while other reports said interventions were continuing.
The RBI shifted from targeting a 5 percent wholesale price index which reacts quicker to weakening exchange after a severe currency crisis in 1991 which kept the currency around 35 to the US dollar and to a consumer price index in 2011.
From around 2016 it had shifted to a ‘flexible inflation targeting regime’ without a clean float. (Colombo/Jan07/2025)
