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'The central bank has highlighted that the slowdown in growth has been limited to a few sectors and overall growth is expected to pick up in the second half of the year.'
Amidst differing views and increasing dissent but in line with the earlier expectations from top economists, the Reserve Bank of India's Monetary Policy Committee (MPC) on Friday, December 6, 2024 retained the repo rate at 6.5% and relaxed the cash reserve ratio (CRR) to infuse liquidity into the banking system.
However the decision on the repo rate (the short term rate at which RBI lends to the banks) was not unanimous as two members of the six member MPC wanted a reduction of 25 basis points to 6.25%.
The divergence within the MPC this time has increased as it was only one member who had voted against the status quo at the October 2024 meeting.
That apart, the RBI has decided to use artificial intelligence and machine learning to detect 'mule accounts' used by fraudsters.
'After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided by a 4 to 2 majority to keep the policy repo rate unchanged at 6.50 per cent.' RBI Governor Shaktikanta Das said.
'Consequently, the standing deposit facility (SDF) rate remains at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate (long term lending rates RBI to commercial banks) at 6.75 per cent,' the RBI governor added.
'The MPC also decided unanimously to continue with the 'neutral' stance and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth,' Das stated.
Within the MPC, Saugata Bhattacharya, Dr Rajiv Ranjan, Dr Michael Debabrata Patra and Das voted to keep the policy repo rate unchanged at 6.50 per cent while Dr Nagesh Kumar and Professor Ram Singh voted to reduce the policy repo rate by 25 basis points.
At the last meeting it was only Dr Kumar who had voted against the MPC's decision, this time around Professor Singh has joined the former.
"With last inflation data above the target band and growth slowing, the RBI chose a cautious approach and maintained the status quo on policy interest rates," Rajani Sinha, Chief Economist, CARE Ratings said.
"The concern is not just on domestic food inflation but also global inflationary risks in midst of geopolitical conflicts and trade war. RBI has upwardly revised the average inflation projection for FY25 to 4.8%, bringing it in line with our expectations," Sinha added.
"As expected, the RBI has lowered the overall GDP growth for FY25 to 6.6%, marginally higher than our expectations of 6.5%. While RBI will be cautious on growth, they don't seem to be overly concerned," Sinha stated.
"The central bank has highlighted that the slowdown in growth has been limited to a few sectors and overall growth is expected to pick up in the second half of the year," Sinha added.
The CRR cut of 50 basis points, Sinha remarked, will provide comfort on the liquidity front and ready the ground for a rate cut later.
This reduction in the CRR would release primary liquidity of about Rs.1.16 lakh crore to the banking system.
According to her, the RBI may go for a shallow rate of 50 basis points in 2025. The consumer price index (CPI) inflation is likely to moderate below 5% in Q1 2025 and that will provide the window for RBI to start the rate cutting cycle.
On his part Dharmakirti Joshi, Chief Economist, CRISIL, felt the RBI has tried to address an unfavourable growth-inflation matrix by reducing the CRR and retaining the repo rate.
After two reductions, the CRR requirement will be back to the pre-pandemic level of 4% this fiscal.
The CRR was cut to prevent excessive draining of liquidity from the economy, which typically curbs economic growth, Joshi said.
The RBI expects the food inflation to be at elevated levels in the third quarter and has raised its inflation forecast by 10 basis points (bps) for the full fiscal 2025.
"The sharper-than-expected GDP slowdown in the second quarter led the RBI to revise lower its projection by a significant 60 bps to 6.6%," Joshi added.
Expecting the MPC to cut the repo rate at its next meeting in February 2025, Joshi said inflation is expected to ease towards the end of this fiscal given healthy agricultural output. When the rabi, or winter, crop reaches the market, vegetable prices tend to correct sharply.
The RBI has decided to use artificial intelligence and machine learning (AI/ML) to curb the use of 'mule accounts' by fraudsters.
'Use of money mule accounts is a common method adopted by fraudsters to channel proceeds of frauds. The Reserve Bank is currently running a hackathon on the theme 'Zero Financial Frauds' which includes a specific problem statement on mule accounts, to encourage development of innovative solutions to contain the use of mule accounts,' the RBI said.
According to the RBI, another initiative in this direction is the AI/ML based model called MuleHunter. This model enables detection of mule bank accounts in an efficient manner.
A pilot with two large public sector banks has yielded encouraging results. Banks are encouraged to collaborate with the Reserve Bank Innovation Hub to further develop the MuleHunter.
The MPC's next meeting is scheduled between February 5 and 7, 2025.
Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com
Feature Presentation: Aslam Hunani/Rediff.com
