CRR Cut is a smart move to stimulate liquidity when our consumption reaches the peak during the festive season from September | Photocredit: Avijit Sadhu
The Monetary Policy Committee (MPC) surprised the markets in a daring step the markets with “blowing all weapons” percentages to push economic growth; A REPO rate reduction with 50 basic points to 5.50 percent to stimulate private consumption and capex investments, and reduced 100 basic points (BPS) in CRR to 3 percent, on a tense basis for guarantee sufficient and sustainable liquidity in the banking and financial system.
Again, strategically the MPC changed the monetary policy position to ‘Neutral’ of ‘accommodation’. Given the benign inflation process of both CPI and Core, the central bank seized the opportunity to stimulate the economy. The combination of tax stimulus by reducing income tax and a cumulative repo of 100 BPS in the past five months (lower EMIs) will result in more funds in the hands of consumers for urban and national consumption.
Interestingly, the flowing and fragile global prospects continue to weigh on the calculations of the RBI, given the lower growth and trading projections by various multilateral agencies.
Fortunately, the Indian economy remains an oasis of growth and financial stability, ideally placed against global overflow problems. Our strong balance sheets of companies, banks, households, government and the external sector are a rarity in the midst of modest global growth.
On the site, inflation is successfully included in the comfort zone of the RBI, in the midst of signs of broad moderation. In fact, the outlook on the nearby and medium term confirms that the inflation process is probably benign, so that the central bank can lower the rates and release liquidity due to CRR dehuments to stimulate credit growth.
The prospects of food inflation remain soft because the monsoon is probably above average, while core inflation will remain benign due to the relaxing international raw materials prices.
As can be seen from the FY26 data so far, the domestic economic activity is resilient with the agricultural sector that stays strong with a good harvest in both the Kharif and Rabi crops on the horizon. The industrial activity improves and the service sector is stable. Private consumption, the mainstay of our key question, is stable and there are encouraging signs of an increase in discretionary expenditures. The shortage in the current account for FY25 is probably low in view of the moderation of the trade deficit in Q4 of FY25 and a strong export and transfer receptions.
Change in attitude
That gives the Central Bank the ability to concentrate on growth and enablers that are needed for growth. The other remarkable announcement was a change in attitude in the neutral of the accommodation value The RBI is indicated with cutbacks on the front and liquidity measures. From here they will look at data prints, global and local growth, speed and inflation dynamics and then accept a call on monetary policy measures. We may not see this calendar any further rate reduction.
But the biggest surprise element in today’s announcements is the 100 BPS that are reduced in CRR to 3 percent. It is a daring step to release more liquidity for banks to implement in the loan. This has come as a smart step to stimulate liquidity when our consumption becomes the peak during the festive season from September, every year. The spread movement to put £ 2.5 Lakh Crore into the system in December 2025 will offer sustainable liquidity. It also lowers the financing costs for banks, which ensures a faster policy transmission.
With the slow pick -up in the private Capex this certainly lowers the real interest rates and this must stimulate the private capex cycle and capacity building. Although the interest rate is not the only factor for such a push, the question that an increase in the next 4-5 months can see would play an important role in improving overall sentiment. The central bank has acted; It is now time to revive the animal spirits, both in consumption and investments.
The writer is deputy director, Kotak Mahindra Bank
Published on June 7, 2025
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