First Cut Anticipated In February, But….; The growth forecast was revised down by 60bps
Achala Jethmalani, Economist, RBL Bank:
FinTech BizNews Service
Mumbai, 6 December, 2024: Shaktikanta Das, Governor, the Reserve Bank of India, gave a statement today following MPC meeting. Decisions and Deliberations of the Monetary Policy Committee (MPC) have bearing upon various aspects of lending, investment, saving, digital & IT, Banking liquidity, FPIs inflows etc. Let’s know what are the views of the leading economists from banks:
Madan Sabnavis, Chief Economist, Bank of Baroda: “The credit policy has largely been on expected lines. The GDP forecast has been lowered against the background of a low Q2 growth number announced by the NSO last week. Based on forecasts for the next two quarters, a number of around 7% has been projected. The inflation projection has been increased to 4.8% which is mainly due to food inflation being high. The RBI has also raised the flag that core inflation can increase as several manufactured and service industry products have witnessed increase in costs and hence prices. However, given a more benign forecast of 4.5% inflation for Q4, there is a good chance of a reduction in repo rate in the next policy.
The RBI has addressed concerned issues on liquidity by lowering the CRR which will coincide with the advance tax flows and quarter end requirements. This will ensure stable liquidity and bond yields for the month. The RBI has also sounded assuring on the forex side given the reserves which can buffer against any shocks. The market reaction in terms of bond yields and stock indices have been largely neutral to these announcements. We can expect an impact on yields once the CRR funds get released in the market.”
Indranil Pan, Chief Economist at YES BANK: “This monetary policy contains many important perspectives for the future. First, there is acknowledgement that growth is slowing while inflation risks need a continuous watch. The backdrop to the policy was a sharp slowdown of growth to 5.4% for Q2 while inflation remained on the higher side and above the tolerance band. Having said, the RBI points to the fact that growth has likely bottomed in Q2 and is expected to rise in the remaining part of the year. On the other hand, inflation estimates for the current year has been moved up by 30 bps, with a sharp jolt seen in the estimates for Q3 inflation that has now been raised to 5.7% from the earlier 4.8%. The RBI assesses that inflation too will moderate to target going forward, but still wants to remain watchful of the evolving trends. Thus, the message appears clear, the RBI will not move the repo rate lower till there is absolutely confidence in inflation moderating to target. Given that we are at the inflection point for both growth and inflation, February remains live. The critical factor to watch out is the Trump policies after he comes into office and its impact on inflation and currency. Probably providing itself flexibility to intervene in the currency markets, the RBI has moved ahead with a 50-bps reduction in CRR. We now anticipate the first cut in February but can be delayed if currency markets were to turn adverse or the anticipated softening in domestic inflation does not materialize.
Sakshi Gupta, Principal Economist, HDFC Bank:
“The RBI opted for a wait and watch mode in todays’ 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. The growth forecast was revised down by 60bps to 6.6% while inflation was revised up to 4.8% for 2024-25. We expect GDP growth to average at 6.4% in FY25, with some pick-up in momentum in the second half of the year.
The more substantive announcement in today’s policy came in terms of the support for liquidity conditions through a CRR cut of 50bps, which is estimated to add INR 1.1 lakh crore 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 FX interventions.
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.”
Achala Jethmalani, Economist, RBL Bank: "A policy of hard choices well delivered. Overlooking the recent data, given growth-inflation outlook, RBI-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 2 of 6 members voted for a Repo Rate cut. If inflation moderates, we will see the first rate cut come through in February 2025. In the meantime, the Reserve Bank has lowered the reserve ratio by 0.50% which would infuse permanent liquidity to the tune of INR 1.16 lakh crore into the system over the course of next two fortnights; favouring banks and keeping money market rates benign. At 4.00% the CRR 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 1H of next year. "
