Vichaara Written by: Anjan Babu
Vichaara Edited by: Akhila Chakrala 
The RBI is legally bound to keep CPI at 4%.
The CPI measures inflation using a basket of products and 45.86% of the weight of the basket is Food. So if Food inflation is controlled, half the job is done for the RBI.
Why was Repo Rate kept unchanged?
1. Food Inflation remains high due to:
- Crop yield has been volatile
- Global pressures are driving edible oil prices higher
2. RBI wants to keep the consumption of Non-Food Items stable.
- When prices of Food Items go up, disposable income to consume non-food items go down.
- RBI tries to keep the prices of Non-Food items low so that they are continued to be consumed. So, your online shopping can continue despite food inflation.
Why CRR was cut?
RBI has not printed sufficient money due to higher food inflation.
Following table represents growth in Narrow Money (Injecting money into banks through printing new currency) since demonetisation.
|
2018-19 |
13.56% |
|
2019-20 |
11.20% |
|
2020-21 (To soften Covid shock) |
16.20% |
|
2021-22 |
10.70% |
|
2022-23 |
6.93% |
|
2023-24 |
7.34% |
Despite high economic growth, the RBI has gradually brought down growth rate in Narrow Money. While Credit is booming, there is a decreased money with banks due to lower Narrow Money. Lower availability of money has led to slowdown in growth of bank deposits
But on the flipside, there is a credit boom. Bank lending continues to grow. Banks are borrowing at higher cost through commercial papers from the Public Markets.
RBI has seen the opportunity to reduce the cost of funds for banks by freeing up the mandated cash reserve ratio by 0.5%. This would allow banks across India to unlock INR 1.16 Lakh Crore of liquidity to continue to fund the Credit boom
Agraga’s Take:
The RBI’s cautious stance on Repo Rate would serve the broader public while also enabling credit growth due to CRR cut. Net Interest Margins would also improve for banks due to freeing up of CRR.
Attributing the slowdown in Q2 economic performance solely to higher interest rates overlooks high food inflation and lower outlay of public funds due to general elections.
The next quarter will offer clarity as public investments kick in and a strong Rabi harvest could ease inflationary pressures.
We leave you with a food for thought. Does food constitute 45% of expenditure for the average Indian household? Should we relook at the weightage for a more accurate inflation targeting.
Inspired Sources:
- RBI Monetary Policy Meeting Highlights
- Mint Newsletter by Vivek Kaul - Growth in bank deposits has been slow because RBI wants it to be slow
- Banker’s welcome RBI move to cut CRR: https://economictimes.indiatimes.com/industry/banking/finance/banking/bankers-welcome-rbi-move-to-cut-crr-will-bring-down-cost-of-funds/articleshow/116050949.cms
- Is targeting Core Inflation the answer? - https://economictimes.indiatimes.com/opinion/et-commentary/is-targeting-core-inflation-the-answer-rbis-repo-rate-dilemma-sparks-debate/articleshow/116018012.cms