The Reserve Bank of India Governor Shaktikanta Das in his latest MPC announcement on Friday decided to keep the repo rate unchanged at 6.5 percent for the 11th consecutive time, despite high inflation and a slowdown in economic growth.
Economists shared with ETCFO that a possible rate cut can happen in the February MPC meet assuming inflation trends to improve. Further, they believe that growth could be muted or on the downside on the back of investments not picking up.
Muted Growth Expected
The RBI has projected FY25 growth at 6.6 percent, down from 7.2 percent in earlier estimates. RBI Governor Shaktikanta said that while the previous quarter saw muted growth due to decreased industrial activity, it is likely to pick up. However, the economists believe that the growth will be on the downside, mainly because of investments not picking up.
We are lower than RBI in terms of real GDP growth outlook. We continue to believe that India’s growth slowdown is structural and not cyclical. A closer look at the nominal GDP data shows that the economy started to slowdown from early 2022, yet extremely low deflator, despite raging inflation, meant that the real GDP data got artificially propped up. We think there could be a downside in growth rather than an upside.Kunal Kumar Kundu, India Economist, Societe Generale
A recent report by HDFC Bank further added that the tone of the policy announcement was dovish, with the RBI recognising that a growth slowdown, if it lingers on beyond a point, may need policy support. “The growth for FY25 is expected to be at 6.4 percent, with downside risks, lower than the RBI’s projection. While rural demand and government spending are expected to increase, the slowdown in urban demand and lack of any meaningful revival in private capex underpin our more cautious estimate,” the report said.
Slightly contrary to this, Madan Sabnavis, Chief Economist at Bank of Baroda highlighted that while growth in on the right track at the moment, there are other risk factors looming in.
GDP growth appears to be well on course, and the only risk factor can be investment not picking up. For inflation, rabi prospects can be the major risk factor.Madan Sabnavis, Bank of Baroda
However, Vivek Iyer, Partner at Grant Thornton Bharat, remained optimistic about India’s growth and said, “GDP of 6.6 percent is a conservative estimate. We believe we will do more, driven by industrial activity and government spending. Domestic growth will be the key driver given muted global growth.” February Rate-Cut on the table
A moderation in inflation over the coming months could open space for the RBI to start its rate cut cycle in the February policy, revealed the report. However, a rise in inflationary risks (warmer winter, risk from rising global food prices including cereals and edible oils) and further depreciation pressure on the rupee could delay rate action to the April policy.
“As inflation will be above 5 percent when the MPC meets in Feb, a conjecture is that future inflation and its trajectory will be the guiding factor. Assuming it looks good, February can be the time when a rate cut can be invoked,” believes Sabnavis.
Resonating with Sabnavis, Kundu added that a rate cut in February is expected but that could still be iffy. While the balance of monetary policy has tilted slightly in favour of growth, headline inflation still appears to remain the enemy number one.
Iyer on the other hand added that a potential rate cut is expected in the April monetary policy and that too only if the inflation is on the lower side consistently over the next 4 months.
RBI is not just looking for a reduction in inflation but is looking for a sustained reduction and a downward trajectory. So far RBI has not been able to see that and hence has not reduced the rate, but the RBI has communicated that it is not averse to the idea through its neutral stance.Vivek Iyer, Partner, Grant Thornton Bharat
Key Growth Drivers
On strategies for growth, Iyer highlighted infrastructure and service exports, saying, “Government initiatives on infrastructure should continue, with greater public-private partnerships. The Indian consumption story remains strong and should drive growth.”
Kundu on the other hand stated, “A policy rate cut is not THE panacea. Real recovery requires interventions at multiple levels, fiscal, industrial, and taxation, to raise employment and wages.”
Sabnavis further pointed to the need for consumption growth in both rural and urban segments and a revival in private sector investment” while emphasising the government’s role in meeting capital expenditure commitments.
Liquidity Support to Increase
The RBI has reduced the cash reserve ratio (CRR) to 4 percent from 4.5 percent to address liquidity woes, announced Governor Shaktikanta Das. This move indicates a balanced strategy aimed at managing liquidity in the banking system while ensuring overall economic stability.
Banking system liquidity has faced multiple pressures in recent days including foreign outflows (rupee depreciation), currency leakage (seasonal trend) and frictional factors like tax outflows. Going forward, the RBI is likely to provide further support to liquidity through various tools including longer-duration VRRs, OMO purchases and sterilising its FX interventions, the HDFC Bank report revealed.
System liquidity surplus stood at Rs 45,000 crores as of 5th December, 2024 compared to Rs 2.87 lakh crore at the beginning of November. Moreover, core or durable liquidity (sum of government cash balances and LAF) has also dropped sharply to Rs 1.29 lakh crore as of 22nd November.
The RBI already carried out a 14-day VRR last week and is said to have done a buy/sell swap in the forward market to limit the impact of its FX operation on domestic liquidity, the report added.
