With CPI Inflation Below 4%, RBI To Focus On Economic Growth

With inflation coming down, RBI’s focus is expected to turn to economic growth. Policymakers agreed that the central bank will most likely reduce the repo rate — the rate at which retail banks borrow from the central bank — in its next MPC meeting in April. In its February MPC meeting, the RBI had reduced the repo rate by 25 basis points to 6.25 per cent.

Bank Credit Demand Tepid

While policymakers are hopeful of another rate cut, many of them opined that banks may take time to pass on the benefit to consumers due to the tight liquidity situation.

Demand for bank credit has been falling as well. In February, it averaged at a little over 11 per cent, compared to above 20 per cent in the corresponding month in 2024. Sluggish investments and acute liquidity crunch have dented credit demand and disbursement.

RBI MPC member Ram Singh noted that excessively contractionary monetary policy has led to the problem. “High interest rates and regulatory tightening have brought down the credit growth rate,” he said.

The central bank, which has started injecting liquidity through open market operations (OMO) purchase auctions of Government of India securities, may also reduce the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) to add more liquidity in the system.

Through its OMO exercise, the RBI will add a total of Rs 1 lakh crore in the system. The central bank uses the OMO option by either purchasing or selling government securities with an aim to maintain money supply.

All projections indicate that inflation will remain benign in the coming months, amid forecast of a normal monsoon. While in February 2024, the CPI-based inflation was 5.09 per cent, in January this year, it was 4.31.

Weak Rupee Cause For Concern

While inflation has softened, fresh challenges have sprung up. The Indian rupee, which has been weakening — falling just short of touching its record low of 88 against the greenback earlier this month — will continue to be under pressure due to heightened global uncertainties.

A possible trade war, what with the Donald Trump administration threatening to slap reciprocal tariffs, is something that is being closely monitored by policymakers and the RBI. The RBI has been aggressively intervening in the foreign exchange market to support the Indian rupee. A weak rupee would have a direct impact on prices, and could once again fan inflationary trends.  

RBI Governor Sanjay Malhotra, in the MPC meeting, said rising uncertainties on the global financial markets and trade policy fronts, coupled with continuing risk of adverse weather events, pose risks to the inflation and growth outlook. 

“We need to be watchful of how these forces play out,” he said. The six-member MPC unanimously voted for a rate cut in February and agreed that the economy needs to be given the required push.