The RBI-led Monetary Policy Committee (MPC) continued its cautious approach by keeping the repo rate unchanged for the 11th time. However, it did try to give a boost to the economy through increasing liquidity in the banking system.
The RBI has slashed Cash Reserve Ratio — a percentage of deposits that the banks have to keep in the form of cash or cash equivalents — by 0.5 per cent, infusing Rs 1.16 lakh crores into the economy. The banks could lend this money to companies or the general public. The fresh lending will increase private consumption, which of late was seen under stress.
It has also raised the limit for collateral-free agriculture loans from Rs 1.6 lakh to Rs 2 lakh per borrower. The move will enhance credit availability for small and marginal farmers and boost spending in the rural economy.
The central bank has also allowed small finance banks to extend credit lines through UPI, which typically target borrowers of small ticket size loans. Lower middle class, which is said to be badly hit by low wage growth, will benefit from this measure
The decision to increase the interest rate cap on foreign currency non-resident bank deposits could make Indian banking system more attractive to Indians staying abroad, which will further increase the flow of foreign currency into India, potentially easing pressure on the rupee.
While RBI continues to believe that inflation could potentially see a spike because of food prices, seasonal corrections and foreign developments, it has continued its neutral monetary stance.
The fact that two of committee members voted to ease monetary stance compared to the previous one member shows the growing support in the committee for a growth-focused policy as against the current one that focused on inflation, sparking speculation about a repo rate cut in the RBI review in February.
