RBI's incremental CRR move a surprise, policy signal: Standard Chartered

The RBI asked banks to hold incremental CRR of 10% on an increase in deposits between May 19 and July 28 in Thursday's monetary policy decision, when it expectedly kept its key policy rate unchanged

The Reserve Bank of India's (RBI) move to ask banks to maintain additional cash reserve ratio (CRR) came as a surprise and could be used as a policy tool, an economist at Standard Chartered Bank said on Friday.

The RBI asked banks to hold an incremental CRR of 10% on an increase in deposits between May 19 and July 28 in Thursday's monetary policy decision, when it expectedly kept its key policy rate unchanged.

The move will withdraw over one trillion rupees ($12.08 billion) from the banking system, the RBI governor said.

"Our inference is that the monetary policy committee could use other policy tools to manage upside inflation surprises rather than simply focus on repo rate," Kanika Pasricha, economist at Standard Chartered Bank, said in an interview on the Reuters Trading India forum.

Pasricha added that as per the RBI's 2022 currency and finance report, liquidity absorption helps inflation management, as "every percentage point increase in surplus liquidity above 1.5% of NDTL (net demand and time liabilities) causes average inflation to rise by 60 basis points (bps)."

Pasricha maintained her call for the RBI to begin cutting interest rates in the first half of fiscal 2025, adding she expected the U.S. Federal Reserve's rate-cutting cycle to begin before the RBI's.

"The Fed is likely to start rate cuts in January-March 2024, while the RBI may wait till June 2024... given that the RBI also hiked less than half versus the Fed in terms of quantum," she said.