RBI Surprises with 50 bps Repo Cut, 100 bps CRR Slash to Boost Liquidity and Support Growth

By- Badrish Kulhalli – Deputy CIO & Head, Fixed Income, HDFC Life

“RBI delivered a surprise in the policy today and has maximised its use of the monetary policy tools available, by cutting policy repo rate by 50 bps, and committing to maintain durable liquidity surplus in the coming months, through CRR cuts of 100 bps. The CRR cut is expected to add RS 2.5 trillion to the banking system.

The sharper than forecast softening of inflation, opened up room for RBI to deliver greater easing. Inflation forecast for the year was lowered to 3.7% from the 4.0% estimated at the previous policy meeting.

There has been no change in the growth forecast, at 6.5%, for the year. However, global events have increased the uncertainty associated with economic activity, and the larger than expected easing is intended to provide support and buffer against any potential headwinds to growth.

With the large cuts today, the MPC mentioned that the space for further easing is limited and hence changed the stance to ’neutral’, though keeping the door ajar for further action, if the growth-inflation developments warrant it.

We see the moves as prudent measures from RBI, as the markets were anyway expecting 50 bps cuts, through over two policy meetings, but the front loading will hasten the transmission of the rate cuts to banks’ lending rates.”