The Reserve Bank of India (RBI) has opted for a pragmatic and balanced approach to address the twin challenges of slowing economic growth and persistent inflation. By maintaining its benchmark repo rate while cutting the cash reserve ratio (CRR), the central bank signals a nuanced strategy to inject liquidity into the banking system without compromising its inflation-fighting credentials. This decision comes at a critical juncture for India’s economy. Growth momentum has visibly weakened, with GDP expansion slowing to its lowest in seven quarters.

Simultaneously, inflationary pressures have resurfaced, driven primarily by food prices. Adding to these concerns, the rupee has depreciated significantly, reflecting external vulnerabilities amid a globally strengthening dollar. The CRR cut is a welcome move, as it frees up substantial liquidity, enabling banks to extend credit at potentially lower rates. This step is expected to ease tight market conditions, where overnight interbank rates have been trending above the policy rate. However, the RBI’s caution in holding rates steady underscores its priority: maintaining price stability as the foundation for sustainable growth.

Advertisement

The central bank’s decision to revise its GDP growth projection downward for FY25 reflects the growing economic headwinds. Inflation, now above the RBI’s tolerance band, has eroded consumer purchasing power, dampening urban consumption and slowing overall economic activity. Yet, there are green shoots of optimism, with signs of recovery in agricultural output and festive spending. While some policymakers argue for rate cuts to spur growth, the RBI has rightly chosen patience. Knee-jerk reactions to short-term data fluctuations could jeopardise long-term economic stability. By keeping its policy stance neutral, the RBI retains flexibility to act decisively when credible evidence emerges of sustained inflation moderation or deeper growth challenges. The rupee’s depreciation has added another layer of complexity.

The RBI’s measures to allow higher interest rates on foreign currency deposits aim to attract non-resident Indian inflows, bolstering forex reserves and easing currency pressures. Such steps demonstrate the central bank’s readiness to deploy targeted tools to address external vulnerabilities without compromising domestic monetary policy objectives. The RBI’s actions reflect a delicate balancing act. On one hand, liquidity infusion through the CRR cut will support economic activity by easing credit conditions. On the other, the decision to hold policy rates steady highlights the central bank’s steadfast commitment to price stability. As India navigates this challenging economic landscape, the RBI’s calibrated approach provides a road map for resilience.

By prioritising inflation control while using liquidity tools to address growth concerns, the central bank ensures that short-term challenges do not derail the broader economic trajectory. This strategy may not appease all stakeholders, but it reflects a long-term vision essential for sustainable development in uncertain times. Ultimately, the RBI’s focus on durability over expediency serves as a reminder: sound economic policy is not about quick fixes but about laying the groundwork for stable and inclusive growth.