RBI policy: Diwali comes early for consumers

If you were walking on Mumbai's Mint Road on Friday, where India's central bank is headquartered, you would have seen fireworks.

- TAMAL BANDYOPADHYAY

Yes, the Reserve Bank of India (RBI) has brought Diwali four and a half months early for consumers this year.

The RBI reduced the policy repo rate for a third successive time, which was widely expected. But what was not expected was the depth of the rate cut—50 basis points (bps). The three rate cuts since February have brought the policy repo rate down from 6.5 per cent to 5.5 per cent in just four months. One basis point is a hundredth of a percentage point.

The RBI did not stop there. The action-packed June policy also pared the cash reserve ratio (CRR)—the portion of net demand and time liabilities (a loose proxy for deposits) which commercial banks keep with the RBI (on which they do not earn any interest)—by 100 bps to 3 per cent.

Staggered over four installments between September 6 and November 26, the CRR cut will release ₹2.5 trillion into the system. Since January, the RBI has infused ₹9.5 trillion liquidity, besides transferring a record ₹2.69 trillion as dividend to the government. What more could the banking system have asked for? The combination of a deep rate cut and a reduction in CRR does not happen often. It has been seen only twice this century—in the wake of the collapse of global investment bank Lehman Brothers Holdings Inc in 2008, and when the Covid-19 pandemic hit India in 2020. On both occasions, neither was the context normal, nor the quantum of the cut exactly identical.