CII urges RBI to cut repo rate, enhance liquidity measures

New Delhi: In a note ahead of the Reserve Bank of India’s (RBI) forthcoming monetary policy meeting scheduled on Friday, Chandrajit Banerjee, Director General of the Confederation of Indian Industry (CII), has recommended a 25 basis points cut in the key repo rate and the implementation of several liquidity-enhancing measures. These suggestions come amidst a slowdown in India’s economic momentum, with real GDP growth moderating to a seven-quarter low of 5.4 per cent in Q2 FY25 from 6.7 per cent in the previous quarter.

Banerjee highlighted that while CPI inflation has been running high, it is primarily driven by rising food prices, which have a disproportionately high weight in the CPI basket at 39.06 per cent. He noted that high interest rates have a limited impact on taming food prices and suggested that the weights in the CPI basket be urgently revised in line with the latest consumption survey weights. This revision would make the rate-setting exercise more effective and less cumbersome for the RBI.

With inflation expected to ease in the coming months due to favorable harvests and ample food grain buffer stocks, Banerjee believes the RBI has a window to consider a policy rate cut. A rate cut would lower borrowing costs, spur private capex revival, reinvigorate consumption, and provide much-needed support to India’s growth trajectory.

In addition to the rate cut, Banerjee proposed several measures to improve banking system liquidity. He suggested conducting open market operations (OMOs) or Variable Repo Rate (VRR) auctions to infuse additional liquidity into the system. He also recommended a calibrated reduction in the Statutory Liquidity Ratio (SLR) from the current 18.0 per cent by 25 basis points every calendar quarter until it reaches 17.0 per cent of the net demand and time liabilities (NDTL). The first reduction should start in January 2025 and continue for the next year.