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Informist, Friday, Dec. 6, 2024

MUMBAI – Following is a compilation of the first views of economists and market experts on the Reserve Bank of India's fifth bi-monthly monetary policy statement for 2024-25 (Apr-Mar) detailed on Friday:

BANKERS

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ANUBHUTI SAHAY, HEAD OF INDIA ECONOMIC RESEARCH, STANDARD CHARTERED

The sizeable cash reserve ratio cut is welcome. As per our estimates, it is likely to neutralise the expected liquidity deficit for the remainder of FY25. Before the CRR cut was announced, we expected headline liquidity to be in deep negative and durable liquidity to be neutral.

Now, both are likely to be either in neutral or in surplus. Additionally, supporting liquidity ahead of any repo rate cut is the right sequencing of the policy measures for effective transmission.

For the policy statement, optically, the statement sounds unperturbed on the Jul-Sept GDP disappointment. Having said that, there are a lot of nuanced statements. For instance, "restoring the unsettled balance between growth and inflation", and "future growth trajectory needs to be monitored closely", which in our view indicates that the February policy still remains live. We maintain our view of 50 basis points of rate cuts split between February and April as we expect inflation to be less than 5% by then.

 
As of now, our sense is the CRR cut is likely to assuage concerns for the remainder of the year on liquidity. Having said that, if we extend the time horizon beyond FY25, especially in a backdrop where external uncertainties can weigh on dollar inflow, there could be a requirement of more durable liquidity injection.

It is possible that the RBI might need to do more via, say, OMO purchases, but it is still premature to call it out. In our view, RBI's GDP growth forecast of 6.6% for FY25 will likely have to be revised lower in future meetings. Our own growth forecast for FY25 is 6.2%.  End

(Shubham Rana)

V.R.C. REDDY, HEAD OF TREASURY, KARUR VYSYA BANK

The Reserve Bank of India's policy announcement adopts a well-balanced and forward-looking stance. Although the GDP growth forecast for 2024-25 (Apr-Mar) has been revised downward, the guidance for FY26 remains optimistic. The short-term moderation in growth, alongside a benign inflation outlook for the next fiscal year, reinforces the likelihood of a rate cut in February.

As anticipated, the RBI has reduced the cash reserve ratio by 50 basis points in a single measure, effective December, thereby infusing durable liquidity of INR 1.16 trillion. This initiative is expected to alleviate money market rates, enhance banks' net interest margins, and facilitate more efficient and swift rate transmission to lending.

The decision to increase spreads for determining foreign currency non-resident account rates over respective currencies, however, is somewhat unexpected. Existing spreads of 250-350 basis points already provide adequate flexibility and headroom for banks to adjust FCNR rates upward.

Overall, the policy inspires confidence in long-term growth prospects and offers reassurance on the inflation outlook, signalling a continued easing environment. Consequently, we anticipate the 10-year government bond yield to range between 6.78% and 6.60% until the next policy announcement. 

(Christina Titus)

ECONOMISTS

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SAKSHI GUPTA, PRINCIPAL ECONOMIST, HDFC BANK

The RBI opted for a wait-and-watch mode in today's (Friday's) policy, keeping its stance and policy rate unchanged as expected. The central bank successfully engineered a fine balance in its communication between the need to remain cautious on growth while achieving price stability. We expect GDP growth to average 6.4% in FY25, with some pick-up in momentum in the second half of the year (Apr-Mar).

The more substantive announcement in this policy came in terms of the support for liquidity conditions through a CRR cut of 50 bps, which is estimated to add INR 1.1 trillion of liquidity to the system. Banking system liquidity has come under pressure in recent days on account of tax outflows, foreign outflows, and higher currency leakage. We expect the RBI to continue providing more 'durable' support for liquidity through various measures, including longer-duration fine-tuning operations, open market operations, and sterilising its interventions in the foreign exchange market.

A February rate cut remains on the table, especially if growth momentum fails to pick up meaningfully over the coming weeks. That said, a rise in global uncertainty and pressure on the rupee or domestic inflation could nudge the RBI to delay any rate cuts to the April policy – preferring prudence and patience over pre-emptive action. 

(Srijita Bose)

TERESA JOHN, DEPUTY HEAD OF RESEARCH AND ECONOMIST, NIRMAL BANG

The MPC decided to keep rates on hold with a 4-2 majority. Nagesh Kumar and Ram Singh voted for a rate cut. The 50 basis point Cash Reserve Ratio cut in anticipation of liquidity tightening suggests a shift in the policy narrative. The Cash Reserve Ratio cut will lead to easing of short-term rates, help boost deposit growth, and favour banks with higher credit-to-deposit ratios, and higher dependence on borrowings.

GDP growth for 2025-26 (Apr-Mar) has been cut to 6.6% from 7.2% earlier. However, the central bank sees growth bottoming out in Jul-Sept and expects growth to be relatively resilient. The CPI estimate for 2025 has been revised to 4.8% from 4.5% earlier. Food inflation is expected to start easing by Jan-Mar, led by moderation in vegetable prices, higher Kharif output, Rabi sowing and buffer stocks for cereals.

With a fall in foreign exchange reserves and depreciation pressure on the rupee on account of foreign portfolio investment outflows and a stronger dollar, the RBI has taken steps to shore up NRIs deposits by lifting the interest rate caps. This will lend stability to the rupee.

Our base case remains a rate cut in the February policy with downside risks to the central bank's growth estimates.  

(Siddhi Chauhan)

DHARMAKIRTI JOSHI, CHIEF ECONOMIST, CRISIL

The Reserve Bank of India has tried to address an unfavourable growth-inflation matrix by reducing the cash reserve ratio and retaining the repo rate. The cash reserve ratio was cut to prevent excessive draining of liquidity from the economy, which typically curbs economic growth. After two reductions, the cash reserve ratio requirement will be back to the pre-pandemic level of 4.0%. But the status quo on policy rates reflected the central bank’s steadfast focus on its prime objective of managing inflation.

The sharper-than-expected slowdown in GDP in the second quarter led the RBI to lower its growth projection for 2024-25 by a significant 60 bps to 6.6%. But the RBI sees the slowdown in the second quarter as transitory and localised to a few manufacturing sectors and expects things to turn better in the second half. Nevertheless, it underscored the intent to act if the growth slowdown gets prolonged. The neutral stance gives it flexibility to cut rates.

We expect conditions to turn favourable for rate cuts with the first one in February. Inflation is expected to ease towards the end of this fiscal year, given healthy agricultural output. When the rabi crop reaches the market, vegetable prices tend to correct sharply. That, in turn, should also improve consumption and growth in the second half of this fiscal year. 

(Christina Titus)

UPASNA BHARDWAJ, CHIEF ECONOMIST, KOTAK MAHINDRA BANK

The start of the rate cut cycle from the February MPC remains on the table, given that the RBI's growth estimates have downside risks, while the inflation trajectory should move towards 4% in 2025-26 (Apr-Mar). However, the timing of the start of the rate cut cycle could be further delayed if spillovers of an adverse external environment and the US administration’s economic and trade policies continue, with erratic weather conditions holding back food disinflation.  

(Christina Titus) 

RAJANI SINHA, CHIEF ECONOMIST, CAREEDGE RATINGS

With the latest inflation data above the target band and growth slowing, the RBI chose a cautious approach and maintained status quo on policy interest rates. The concern is not just on domestic food inflation but also global inflationary risks in the midst of geopolitical conflicts and trade war. The central bank has highlighted that the slowdown in growth has been limited to a few sectors and overall growth is expected to pick up in the second half of the year. While the RBI will be cautious on growth, they don’t seem to be overly concerned.

We expect the RBI to go for a shallow rate of 50 basis points in 2025. CPI inflation is likely to moderate below 5% in Apr-Jun 2025 and that will provide the window for the RBI to start the rate-cutting cycle. There is no denying that there are some concerns on the growth front and as the RBI gets comfort on food inflation front, they would initiate a shallow rate cut cycle.

(Srijita Bose)

AURODEEP NANDI, INDIA ECONOMIST, EXECUTIVE DIRECTOR, NOMURA INDIA

Contrary to our expectation that the RBI would deliver a 25-basis-point cut in the policy rate in its December meeting, the rate was left unchanged. However, the RBI delivered a cut in the cash reserve ratio by 50 basis points, as we had anticipated. The policy decision continues to prioritise inflation control over growth rescue. Our view remains that the growth glass is half empty, not half full, and the recent sharp slump in gross domestic product growth should have highlighted the higher growth sacrifice involved in keeping policy rates elevated.

Meanwhile, the inflation increase is concentrated primarily in a few food items and underlying inflation remains subdued. However, there are indications that the policy paradigm could be shifting, which reflects in additional dissent within the monetary policy committee (4-2 vs 5-1 in favour of pause), Governor Das' commentary that the growth outlook warrants monitoring, and the downgrade of FY25 GDP growth to 6.6% from 7.2%.

(Vidhushi RajPurohit)

ACHALA JETHMALANI, ECONOMIST, RBL BANK

A policy of hard choices well delivered. Overlooking the recent data, given the growth-inflation outlook, MPC has struck the right chords. Giving what markets expected--a pause on policy rates and durable liquidity infusion. Given the inflationary pressures, the policy rates held steady with repo rate at 6.50%. This time, two out of six members voted for a repo rate cut. If inflation moderates, we will see the first-rate cut come through in February.

In the meantime, the Reserve Bank has lowered the Cash Reserve Ratio by 50 basis points which would infuse permanent liquidity to the tune of INR 1.16 trillion into the system over the course of next two fortnights, favouring banks and keeping money market rates benign. At 4.00%, the cash reserve ratio is now at pre-COVID levels. The surplus liquidity conditions in the system augur well for faster monetary transmission as and when the window to cut opens up. The time is ripe for deposits to be locked-in and expect softer borrowing rates in the first half of next year. 

(Christina Titus)

MADHAVI ARORA, CHIEF ECONOMIST, EMKAY GLOBAL FINANCIAL SERVICES

Given the challenges around the timing and the window of conventional rate cuts, and foreign exchange cost of rate cuts (liquidity implication/sterilisation cost, and imported inflation amidst fluid global dynamics), a cut of 50 basis points in the cash reserve ratio was the least costly measure for the RBI. 

A reversal of the ratio to the pre-COVID 4% level implies an infusion of INR 1.2 trillion at a time when core liquidity may steadily move to deficit ahead, with unsterilised foreign exchange intervention and currency-in-circulation leakages. More importantly, this liquidity infusion could lead to better and immediate transmission of cuts as and when the RBI commences the (shallow) cut cycle amid the limited window. Had there been no policy support, the system liquidity deficit would likely have crossed INR 3 trillion-INR 3.5 trillion by the end of March 2025, as per our estimates.

Going ahead, while rate cuts would still be a tricky call, we also keep a watch on unconventional measures, specifically, easing regulatory lending norms gradually ahead in order to re-spur waning credit offtake. The move to incentivise foreign currency non-resident account borrowings (by raising the interest rate ceiling) reflects the fact that the RBI would be weighing the cost of heavy foreign exchange intervention in the past two months ($35 billion-$40 billion in spot and forwards; $60 bln NDF) amid FPI outflows and limited conviction on steady inflows ahead. This is clearly a tacit attempt to tap other sources of foreign capital flows, which could give RBI some breathing room and lower its need for foreign exchange intervention. 

(Cassandra Carvalho)

FUND MANAGERS

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SANDEEP YADAV, HEAD - FIXED INCOME, DSP MUTUAL FUND

The RBI has erred on caution. They did a CRR (cash reserve ratio) cut, but no repo cut (our base case in pre-policy expected one of the two, with dispersion risks). No rate cuts mean no shocks. However, the RBI announced CRR cut to ease liquidity. They did not have much choice. With liquidity set to tighten by around 1.5 lac cr (1.5 trillion), the RBI had to give durable liquidity. In fact, RBI's FX swaps earlier this week had already forewarned us about this action.

RBI has changed their view on inflation targeting. Inflation management has now become "flexible", from a target of "4%". Thus, the RBI continues to move in the direction cast in the last policy when they mentioned that they have a "dual mandate" of growth and inflation. Also, when inflation was close to 4%, the RBI decided to "look through it" as CPI would rise in Oct-Dec (which it did) and it was "inflation projection" that mattered, not "current inflation". When RBI said Friday that inflation would be 4.5% next quarter, they decided not to focus on "inflation projection" but at the "current inflation".

We believe it's because of the rupee risk. An easy monetary policy can only lead to further pressure on the rupee, and the RBI must remain cautious. Governor Das couldn't have spelt out the rupee risks in the policy as that would have put more pressure. Despite what RBI says, the rupee risks remain dominant in RBI as evidenced by the increase in foreign currency non-resident account rates. All in all, before going into the policy, the market was divided. Thus, post-policy, there will be critics and proponents. For us, we think it was a balanced policy - hedging all the risks.

(Sachi Pandey)

PRASHANT PIMPLE, CHIEF INVESTMENT OFFICER – FIXED INCOME, BARODA BNP PARIBAS MUTUAL FUND

The market reacted negatively with the 10-year benchmark (6.79%, 2034 gilt) rising by 2-3 basis points immediately after the announcement. Going ahead, we believe markets will be range bound to approximately 10-15 bps from current levels. Despite the Cash Reserve Ratio cut, liquidity will remain at neutral levels going ahead due to scheduled auction outflows and tax outflows which would provide a floor to money.

(Srijita Bose)

DEEPAK RAMARAJU, SENIOR FUND MANAGER AT SHRIRAM ASSET MANAGEMENT CO.

The RBI Monetary Policy Committee kept the repo rates unchanged based on 4:2 voting. The committee also kept the marginal standing facility and standing deposit facility unchanged. The primary focus is to ensure price stability and hence the focus is to bring inflation down to the target. The RBI has opinioned that the slowdown has bottomed out in Jul-Sept and indicated a pickup in high-frequency indicators. The rural demand has shown early signs of recovery, whereas the urban demand remains muted. The RBI has reduced the GDP growth projection from 7.2% to 6.6% for 2024-25 (Apr-Mar). The RBI has revised the projected inflation to 5.7% in Oct-Dec and 4.6% in Jan-Mar. The entire year's CPI projection is changed to 4.8% from 4.5%. Further to improve the liquidity, the RBI has cut the cash reserve ratio by 50 basis points to 4%.

The RBI has remained overall accommodative to boost growth and maintain price stability. The cut in CRR and bottoming out of the slowdown will augur well with the equity markets in the medium term. The cut in CRR was a welcomed move and will lead to improved credit growth due to increased liquidity in the system. The earnings are expected to pick up in Jan-Mar which will be supported by a pickup in government spending. 

(Anjana Therese Antony)

OTHERS

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A. PRASANNA, HEAD OF RESEARCH, ICICI SECURITIES PRIMARY DEALERSHIP

The MPC meeting outcome was as per our expectations, so nothing was a surprise for us. We still expect a rate cut in February. The growth and inflation projections look achievable, but actual prints could be marginally different.

The RBI can take its time over its future liquidity actions after today's cash reserve ratio cut. Over the next quarter or the subsequent quarter, the RBI can look at open market operation purchases as the next stage, but the central bank can take its time.

RBI can see on the forex side what is happening now and how the flows are shaping up, and accordingly, they can do OMO buys. In December, apart from the CRR cut, the RBI can manage just through variable rate repos. 

We still expect just 50 basis points of rate cut in two meetings, but the quantum required can always be reassessed once the cutting cycle starts and how the data shapes up.  End

(Shubham Rana)

RAJAN JAIN, HEAD OF RESEARCH, SBI CAPITAL MARKETS

Owing to a sharp correction in the growth forecast, the RBI chose to cut CRR by 50 basis points to 4% to pre-COVID levels, pumping in INR 1.16 trillion of liquidity into the system. This is much needed in the wake of rupee outflows in recent weeks draining the system, and expected outflows later this month owing to taxes. With the current reduction in global volatility a calm before the storm when US president-elect Donald Trump assumes power in January, the RBI will maintain caution. Direct tax outflows in December, and continued selling by foreign portfolio investors have the potential to constrain rupee liquidity and the CRR cut will be warmly welcomed by the markets.

The RBI projects a recovery in H2FY25 numbers. This mirrors our expectations of 6.6% real GDP growth for FY25. We foresee some optimism in Oct-Mar 2025, contingent on high-frequency indicators maintaining their festive momentum, resumed government capital expenditure, a pick-up in rural demand, and recovery in industry activity in Jan-Mar 2025. External volatility remains a risk, and we expect its major impact to pan out in FY26.

The RBI projects inflation to only reach the target in Jul-Sept FY26. Based on these old and fresh upside risks, we raise our FY25 inflation estimate to 4.8% from 4.7%, in tandem with the RBI's projections.

While the labour market continues to soften with in-check inflation, despite disjointed GDP prints, easing monetary actions by the Federal Open Market Committee are expected to support India's rate-cutting cycle too. Going forward, the outlook is clouded by rising tendencies of protectionism which have the potential to undermine global growth and push inflation higher.

We believe that in a deteriorating global pitch, MPC might be factoring in the risks of sharper outflows by foreign institutional investors and thereby, currency movements, while pushing the easing cycle forward, knowing that foreign exchange reserves are only a 'buffer' to some extent. We expect the yield on the 10-year (6.79%, 2034 gilt) to likely remain in the 6.5-7.0% range, with volatility influenced by global factors despite India's strong fundamentals. Short-term gilt yields, influenced by liquidity to a greater extent, maintain their temperament as markets re-aligned expectations of ensuing RBI policy actions on liquidity. We believe the RBI and the government have sufficient tools to stabilise the economy, especially in FY26 when the risks are likely to peak. 

(Srijita Bose)

POONAM TANDON, CHIEF INVESTMENT OFFICER, INDIAFIRST LIFE INSURANCE

The RBI policy has been very prudent and practical and, as expected, kept the repo rate unchanged. In the form of a Cash Reserve Ratio cut, the RBI delivered what was required: the liquidity increase may be a more immediate boost for growth than a rate cut.

While a February repo rate cut now seems possible, the MPC may skip that if inflation remains high. That call becomes even more difficult to make with the uncertainty around the tenure of the RBI governor.

I don't think the RBI's next steps on liquidity will be an open market operation, because they don't seem to want to disrupt the market. Further tightness in liquidity may be resolved by larger quantum of variable rate repo operations.

For my view on gilts, I think the rupee depreciation still remains a concern. The curve has already steepened, the 10-cross-30 year bond's spread has already widened to 30 basis points. More of that will continue, even though there is no explicit guidance on a rate cut.

(Aaryan Khanna)

VINIT BOLINJKAR, HEAD OF RESEARCH AT VENTURA SECURITIES

The Monetary Policy Committee decided to keep the benchmark repo rate unchanged at 6.5% for the 11th consecutive meeting, signalling a cautious stance on economic growth and inflation. In a bid to inject liquidity into the banking system, the MPC also slashed the cash reserve ratio by 50 basis points to 4%, which will infuse INR 1.16 trillion into the system. Additionally, the RBI raised its CPI inflation target for 2024-25 (Apr-Mar) to 4.8% from the earlier 4.5%, citing inflationary pressures, especially from food prices. Consequently, the RBI revised its GDP growth forecast for FY25 downward, reducing it from 7.2% to 6.6%, reflecting the challenges posed by global uncertainties and domestic factors. Governor Das also announced an increase in the limit for collateral-free agricultural loans to INR 200,000 per borrower and proposed a new benchmark secured overnight rupee rate to enhance transparency and liquidity in the money markets. The measures aim to strike a balance between liquidity support, inflation control, and growth stimulation. The rupee could benefit from increased foreign inflows, while bond yields may remain elevated due to inflation concerns. Gold and other safe-haven assets might attract investor interest. 

(Anjana Therese Antony)

End

Compiled by Mansi Patil

Filed by Akul Nishant Akhoury

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