RBI partially accepts demands of industry

The Reserve Bank of India (RBI) has not presented any unfavourable surprises. The central bank of the country has maintained the repo rate at 6.50%, adopting a neutral stance that clearly emphasises managing inflation. Additionally, it reduced the Cash Reserve Ratio (CRR) by 50 basis points to 4%, surpassing the anticipated 25 basis points reduction.

In brief:

1. CRR reduction of 50 basis points

The RBI governor has implemented a 50 basis point decrease in the cash reserve ratio, which will release Rs 1.16 lakh crore into the financial system, thereby facilitating credit expansion and invigorating economic activity, potentially enhancing profitability. However, the question remains whether this measure will sufficiently address the declining growth figures.

Debopam Chaudhuri, Chief Economist at Piramal Enterprises, remarked, “It is reassuring to see the RBI maintaining its independence in the face of pressures for a rate cut from fiscal authorities. Nevertheless, the timing may not be ideal. The CRR reduction acts merely as a temporary solution to alleviate pressures in the money markets, as liquidity is expected to tighten from December 2024 to March 2025. This decision is likely to release Rs 90,000 crores in December and Rs 1.16 lakh crores by March 2025. However, the impact is anticipated to diminish after that, as banks may utilize this additional liquidity to settle some of their non-deposit liabilities. Banks' liabilities to the broader banking system have surged from Rs 2.5 lakh crores in 2019 to Rs 5 lakh crores by October 2024.”

Prashant Pimple, Chief Investment Officer – Fixed Income at Baroda BNP Paribas Mutual Fund, noted, “Looking ahead, we expect the markets to remain within a range of approximately 10-15 basis points from current levels. Despite the reduction in the cash reserve ratio, liquidity is projected to remain neutral due to scheduled auction outflows and tax payments, which will likely establish a floor for the money market.”

Amit Somani, Senior Fund Manager – Fixed Income at Tata Asset Management, remarked, “In light of the anticipated tightening of liquidity conditions over the coming months—due to tax outflows, currency circulation, and fluctuating capital flows — the RBI has implemented a cut of 50 basis points in the Cash Reserve Ratio (CRR), bringing it back to 4%. This adjustment is expected to stabilize short-term interest rates in the immediate future, with one-year Certificate of Deposit (CD) rates hovering around 7.50% to 7.60%.”

2. FY25 GDP target revised down to 6.6%

Following the unexpected Q2 GDP results, economic growth has become a significant topic of discussion. The RBI, while maintaining a neutral stance, has indicated its caution. The GDP target for FY25 has been adjusted downward to 6.6% from the previous estimate of 7.2%. The central bank pointed out that global uncertainties, adverse climatic conditions, and volatile market movements present risks to GDP projections.

Dharmakirti Joshi, Chief Economist at CRISIL, stated, “We foresee a 25-basis-point reduction in the repo rate during the Monetary Policy Committee's review meeting in December, driven by the expectation of a decline in food inflation. Additionally, we predict GDP growth will moderate to 6.8% for this fiscal year, compared to the 7.2% forecasted by the RBI. Agricultural output is anticipated to improve due to favourable rainfall during the kharif season and better prospects for the rabi season, thanks to an improved water reservoir situation. However, global risks and uncertainties remain, particularly with rising tensions in the Middle East, unpredictable weather patterns, and the implications of the upcoming US elections. This context explains the central bank's cautious approach and its decision to maintain a conservative stance.”

3. The inflation target has been adjusted upward.

While adopting a neutral position, the RBI has indicated its unwavering commitment to addressing inflation. It anticipates a reduction in inflation rates during the third quarter, driven by robust festive demand and favourable conditions for rabi crop sowing. Consequently, the central bank has updated its full-year inflation forecast to 4.8%.

Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, remarked that “The central bank has skillfully navigated the balance between inflation and growth by maintaining the repo rate while reducing the Cash Reserve Ratio (CRR). The growth forecast has been adjusted downward, while the inflation estimate has been revised upward in light of the Q2 GDP figures released during the RBI Monetary Policy Committee meeting.”

Gaura Sen Gupta, Chief Economist at IDFC First Bank, noted, “The decision to maintain the status quo was influenced by the high inflation levels, which pose a risk to growth by diminishing consumer purchasing power. Taking into account the current pressures from elevated food inflation, the RBI has raised its Consumer Price Index (CPI) inflation estimate for FY25 to 4.8%, up from the previous 4.5%. The projected quarterly trend suggests a decline in inflationary pressures starting from Q4FY25, with an average of 4.4% anticipated from Q4FY25 to Q2FY26.”

4. The repo rate remains unchanged.

The Central Bank has decided to keep the repo rate steady for the eleventh consecutive meeting. Nevertheless, there are anticipations that a reduction may occur in the upcoming February meeting. Nikhil Gupta, Chief Economist at MOFSL Group, stated, “We commend the RBI's composure in light of recent GDP data and its focus on long-term goals. We expect that rate cuts could commence in February 2025 or later, as we foresee another disappointing GDP growth outcome.”