The Reserve Bank’s rate-setting panel, the Monetary Policy Committee (MPC), begins its meeting here on Wednesday (4-6 December) amidst a series of negative macroeconomic data surprises, with the 5.4 percent GDP growth in the second quarter being the worst. This leaves the central bank with little choice but to begin supporting growth now.
The banking regulator has been focused on taming inflation since February 2023. This has led many Mint Road observers and bankers to expect the monetary policy announcement on December 6 to include growth-boosting measures, such as a reduction in the CRR or SLR, but not a cut in policy rates due to persistent inflation
While the Q2 GDP growth has slumped sharply to much lower than expected 5.4 percent—RBI had it pegged at 7 percent in the October policy review--, October inflation came in at 6.21 percent and food prices are still on fire. So significant decline is not expected even in November. On top of that, data on the consumption, which contributes more than half of the GDP, are indicating sluggishness, more so in urban markets. Even the key manufacturing numbers are falling with the November PMI slumping to an 11 month low of 56.5 percent and so did the September IIP at 3.1 percent.
The three-day MPC meeting also comes within weeks after two senior most ministers, including finance minister Nirmala Sitharaman calling for rate cuts. This is for the first time since the MPC was instituted with an Act of Parliament in September 2018 that minister began to publicly call for rate cuts.
So far in his six-year tenure that ends on December 12, the governor Shaktikanta Das had a very cordial relationship with the government. What has spoiled this relationship, according to many, at the fag end of his tenor is the vastly differing growth forecasts of the two and the RBI’s blind focus on taming inflation which still has not been managed yet.
Three bankers with whom TNIE has spoken—two public sector and one from the private sector—expect the RBI to leave the key repo rate unchanged at 6.5 percent for the 11th time as inflation remains highly above the tolerance level at 6.21 percent, but to do something concrete to make money cheaper.
“I expect a 25-50 bps reduction in the cash reserve ratio (CRR) from the 4.5 percent now. More than the actual impact of the act, this can send the right signal to the market that RBI is there to offer liquidity. If not the CRR, at least RBI should lower the SLR (statutory liquidity ratio), by at least 1 percentage points from the 19 percent now,” two public sector bankers told The New Indian Express.
With the deposits crossing Rs 214 trillion in the last week of November, this means that the banks are being around Rs 7.5 trillion with RBI and earn no interest from them.
“I don’t see a repo rate cut, but the central bank has to do something urgently to address the costly money. Some serious liquidity boosting measures are the need of the hour. Credit growth started limping now and the most needy segments are not able to borrow money,” a private sector banker said.
In a note ahead of the MPC meeting, SBI chief economic advisor Soumyakanti Ghosh said he does not expect anything on December 6, but first rate cut after two years will come in February as he see inflation remaining above 5 percent in November and December even though vegetable/protein prices shows huge moderation in November.
“We believe the policy stance should continue to be neutral, supporting growth and the first rate cut in February 2025, saying it is important that the low Q2 GDP 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.
“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,” Ghosh said, adding “considering this, we think RBI may tweak CRR at a micro basis on specific liabilities and make the tool counter cyclical for future.”
American brokerage Bank of America Securities said, “despite seeing a very weak GDP print, the RBI appears set to be on hold, but the MPC decision could be more contested than previous meetings, with more than one members voting for a rate cut, as GDP growth slowdown in H1 adds to the list of policy concerns.
We see some liquidity injection to manage front-end rates, and even contemplate a reduction in CRR from its current 4.50 percent level,” they said, adding rate cuts appear only likely in February MPC, given that CPI inflation remains above the tolerance band. If CPI comes off sharply, the RBI could contemplate an intermeeting move to cut rates, but the bar for that step remains high.
House economists at Deutsche Bank India said “even though the sub-6 percent GDP growth warrants a front loaded rate cutting cycle they expect a status quo this week in light of the recent spike in CPI inflation. However, with GDP printing sharply undershooting the MPC’s expectations, a February 2025 rate cut may be on the table if the next two inflation prints recede."
Madan Sabnavis, the chief economist at Bank of Baroda, said, given the rather uncertain global environment and the possible impact on inflation and the fact that currently inflation has been averaging close to 5.9 percent in the last two months, a status quo on repo rate will be the logical outcome from the policy.
There will be changes in RBI projections for both inflation and GDP as inflation has been higher so far than the RBI forecast for Q3 and GDP growth has come much below expectations in Q2. It would hence be of interest to see what the projections this time are.
Tanvee Gupta Jain, the chief economist at UBS Securities India also doesn’t see a repo rate cut Friday but from February if inflation moderates.
Icra Ratings chief economist Aditi Nayar opined that given where CPI is we anticipate a status quo from the MPC later this week, in spite of GDP print undershooting the MPC’s expectations. We anticipate that the MPC will moderate its growth forecast for FY25 this time. A February 2025 rate cut may be forthcoming if the next two inflation prints recede.