As the Reserve Bank of India (RBI) is set to begin the last Monetay Policy Committee (MPC) meeting of 2024 on December 4, the expectations on the rate cut have started coming in.
State Bank of India (SBI) in its report said it does not foresee rate cut during the current financial year, nor in favor of any such move.
It anticipated that the first rate cut and further change in stance likely in April 2025.
RBI needs to recalibrate its liquidity management strategy
SBI in its report referred to the recently released disappointing Q2 growth numbers and said it is better that the Q2 growth numbers do not prompt a knee jerk reaction in terms of monetary impulse like rate cut as headline inflation continues to trade at uncomfortable levels, though it is supposed to moderate from November.
Notably, India’s economic growth decelerated significantly in July-September, reaching 5.4% year-on-year. The estimates were considerably below the analysts of 6.5% and the central bank’s 7% estimate.
SBI in its report said one of the reasons is the sluggishness in capital expenditure in H1 (both Centre + states) with precarious state of states evident as out of 17 major states only five states exhibited increase in expenditure in H1 FY25 as compared to H1 FY24.
It said that the RBI needs to recalibrate its liquidity management strategy.
While a cut in CRR would be a de facto option, the Central bank in the past has expressed in no unambiguous terms that the use of headline CRR as a liquidity management tool may not be the ideal path.
It further proposed that RBI may look at tweaking CRR at a micro basis on specific liabilities and make the tool counter cyclical for future.
CPI to remain above 5%
SBI has predicted that the Consumer Price Index (CPI) inflation is expected to remain above 5% in the remaining months of 2024 even though vegetable/protein prices shows huge moderation in November.
With food consumption the bulk of rural populace and rural consumption holding up, the stickiness in food inflation is likely to be prolonged, it added.
Notably, India’s retail inflation increased to 14-months high of 6.21% in October 2024, from 5.5% in September, owing to rise in food prices which rose by 261 bps in last 3 months.
