RBI's Strategic Moves: Balancing Inflation and Growth

The Reserve Bank of India announces a strategic cut in the cash reserve ratio to boost liquidity while projecting a rise in inflation. The RBI highlights the impact on GDP growth and the role of domestic and global factors in shaping the economic outlook amidst challenges and opportunities.

The Reserve Bank of India (RBI), under Governor Shaktikanta Das, has strategically reduced the cash reserve ratio for all banks by 50 basis points, setting it at 4% of net demand and time liabilities. This move, executed in two phases on December 14 and December 28, aims to inject Rs 1.15 lakh crore into the banking system, substantially enhancing liquidity across the economy.

Alongside, the RBI has revised the inflation projection for the fiscal year 2025 to 4.8% from the previous 4.5%. Sector-wise forecasts indicate a peak inflation of 5.7% in Q3, moderating to 4.5% in Q4. The RBI anticipates easing food inflation due to favorable agricultural conditions and high seasonal productivity, despite persistent food price inflation in the third quarter.

Governor Das highlighted concerns over slowing domestic GDP growth, which recorded a significant drop to 5.4% in Q2 of FY24 from a previously higher estimate. This decline is primarily linked to reduced industrial and manufacturing activity. However, indicators suggest a possible rebound in rural and festive demand in upcoming quarters, ensuring cautious optimism against a backdrop of global economic resilience and regional challenges.

(With inputs from agencies.)