A cautiously dovish, par-for-the-course policy

"It's all about managing expectations." That's what Reserve Bank of India (RBI) Governor Shaktikanta Das said while settling down for the customary post-policy interactions with the media on Thursday.

- TAMAL BANDYOPADHYAY

The monetary policy, Das' last before his current term ends next week, managed the expectations quite well. Those who were expecting a rate cut would be disappointed, but it was par for the course overall.

The RBI's monetary policy committee has left the repo rate unchanged at 6.5 per cent but cut the cash reserve ratio (CRR) or the portion of deposits that commercial banks keep with the central bank by 50 basis points to 4 per cent. One basis point is a hundredth of a percentage point.

This will release ₹1.16 trillion into the banking system in two phases between December 14 and 28.

In his interaction with the media, Das described the CRR cut as "normalisation" of its level. It was raised to 4.5 per cent in April 2022 when the last policy-tightening cycle started.

Why did the RBI go for a CRR cut? It expects tighter liquidity in the next few months on account of advance tax outflow, rise in currency in circulation and significant amount of foreign capital outflow.

India's foreign exchange reserves rose to $704.9 billion on September 27. In the next two months, by November 22, the pile of foreign exchange reserves dropped to $656.6 billion. The combination of dollar sale by the RBI to prevent a sharp fall in the local currency and the erosion in valuation contributed to this drop.