RBI MPC Meeting Announcements: No negative surprises from the Reserve Bank of India. The RBI kept repo rates unchanged at 6.50% with a neutral stance and unambiguous focus on inflation. It has cut the Cash Reserve Ratio by 50 basis points to 4%. There were expectations of a 25 bps cut in CRR. This is higher than estimates.
Here is a quick recap of the key announcements by the RBI Governor and what it means-
1. CRR cut by 50 bps
The RBI Governor has cut the cash reserve ratio by 50 basis points freeing up Rs 1.16 lakh crore of liquidity in the system supporting credit growth and stimulating economic activity which could potentially boost profitability But is that enough to boost the faltering growth numbers?
Debopam Chaudhuri, Chief Economist of the Piramal Enterprises pointed out that, “It is encouraging to note RBI asserting its independence amidst pressures of a rate cut arising from fiscal policy makers. However, the timing may not be optimal. The CRR cut only serves as a band-aid to ease money markets as liquidity tightens from December’24 to March’25. This announcement will potentially release Rs 90,000 crores in December and Rs 1.16 lakh crores by March’25. The effect is expected to fizzle out beyond that, with banks deploying this additional liquidity to repay some of their non-deposit liabilities. Banks’ liabilities to the rest of banking system doubled from Rs 2.5 lakh crores in 2019 to Rs 5 lakh crores by Oct 24.”
Prashant Pimple Chief Investment Officer – Fixed Income, Baroda BNP Paribas Mutual Fund added that, “Going ahead, we believe markets will be range bound to approximately 10-15 bps from current levels. Despite cash reserve ratio (CRR) cut, liquidity to remain at neutral levels going ahead due scheduled auction outflows and tax outflows which would provide a floor to money.”
Amit Somani, Senior Fund Manager – Fixed Income, Tata Asset Management added, “To address the likely tightening of liquidity conditions further over next few months – on account of tax outflows, currency in circulation and volatile capital flows – RBI gave a 50bps CRR cut, restoring it back to 4%. This is likely to stabilize short-term rates in the near term, with one year CD rates trading around 7.50%-7.60% levels.”
2. FY25 GDP target lowered to 6.6%
After the Q2 GDP shocker, growth has been a key talking point. The RBI while keeping a neutral stance, signalled its circumspection. The FY25 GDP target has now been reduced to 6.6% from 7.2% earlier. The RBI highlighted that global uncertainties and climatic consition coupled with volatile market movement pose risks to the GDP estimates.
Dharmakirti Joshi, Chief Economist, CRISIL said, “We anticipate a 25-basis-point reduction in the repo rate during the MPC’s policy review meeting in December, in response to the expectation that food inflation will decline. We also expect GDP growth to moderate to 6.8% this fiscal compared with 7.2% forecasted by RBI for this year. Agricultural output is expected to improve with rains favourable during the kharif season and prospects for the rabi season improving because of better water reservoir position. Globally, risks and uncertainties persist, with escalating tensions in the Middle East, weather uncertainties and outcome of US elections in focus. Reason why the RBI took a cautious approach and kept its powder dry.”
3. Inflation target revised higher
While maintaining a neutral stance, the RBI was quite clear in signalling its unambiguous focus on inflation. It expects that inflation print to come down to a certain extent in Q3 on the back of strong festive demand, favourable rabi crop sowing. The RBI has revised the full-year inflation estimates to 4.8%
Nilesh Shah, MD – Kotak Mahindra AMC outlines that “The RBI has walked a delicate balance between Inflation and Growth by keeping repo rates unchanged and cutting CRR rates. Estimate of Growth is revised downwards while inflation is revised upwards to reflect the Q2 GDP number on RBI MPC announcement.”
Gaura Sen Gupta, Chief Economist- IDFC First Bank added, “The status quo was driven by elevated inflation seen as a risk to growth, as it erodes purchasing power of consumers. Incorporating near-term elevated food inflation pressures, RBI revised-up FY25 CPI inflation estimate to 4.8% (from previous estimate of 4.5%). The quarterly trajectory indicates inflation pressures easing from Q4FY25 onwards, averaging at 4.4% (Q4FY25 to Q2FY26).”
4. Repo rate remains unchanged
The Central Bank kept repo rates unchanged for the 11th straight meeting. However, there are expectations that it may ease going forward in the February meeting. Nikhil Gupta, Chief Economist, MOFSL Group said, “Overall, we appreciate RBIs calmness despite recent GDP data and their focus on long-term objectives. Rate cuts could begin from Feb’25 or later, as we expect GDP growth to disappoint once again.”