MUMBAI: The dual action of the RBI keeping the policy rates unchanged for the 11th time and at the same time slashing the cash reserve ratio by 50 bps to 4 percent, offering a long rope to lenders to push credit at a comparatively cheaper rates, has left the analysts community divided on the immediate next repo rate cut.
A majority still seeing the rate cycle easing from February if November and December inflation rates come within the forecast, while some others expect this only from next fiscal.
Stating that the 50 bps CRR reduction will help support growth, after the sharp downward revision in the forecast for FY25, Icra Ratings' chief economist Aditi Nayar said; “If the CPI inflation retraces to below 5 percent by the December, the likelihood of a repo cut in February will rise sharply.
”Echoing similar views, Dharmakirti Joshi, chief economist at Crisil Ratings, said, the Reserve Bank has tried to address an unfavourable growth-inflation matrix by reducing the CRR and retaining the repo rate reflecting the central bank’s steadfast focus on its prime objective of managing inflation.
“We expect conditions to turn favourable for rate cuts with the first one in February as the RBI feels the Q2 slowdown as transitory and localised to a few manufacturing sectors, and expects things to turn better in the second half. On the other hand it expects inflation to ease towards the end of this fiscal given healthy agricultural output,” Joshi said.
According to Sakshi Gupta, an analyst with HDFC Bank, the central bank successfully engineered a fine balance in its communication between the need to remain cautious on growth while achieving price stability.
“This has given scope for a February rate cut, especially if growth momentum fails to pick-up meaningfully over the coming weeks,” Gupta said, adding however, the bank expects GDP to print in at 6.4 percent which even below the revised RBI estimate of 6.6 percent.
Stating the RBI acted prudently and practically by cutting the CRR and leaving the policy rates unchanged, economists at Deutsche Bank India said this has paved the way for repo rate cuts.
“We see a 25 bps repo rate cut in February followed by a similar quantum cut in April 2025 as the CRR cut has always been a precursor to policy rate reduction," they said highlighting that the CRR cut was the need of the hour and RBI has chosen the right time to cut it as it will arrest excessive tightening of liquidity in the future.
The Deutsche Bank India analysts also feel that the growth risks are to the downside, even after the downward revisions and inflation could turn out to be lower than RBI's forecast for H2.
Subhasri Narayanan, a director at Crisil Ratings, said “CRR reduction will have a two-fold impact on banks profitability. One, the additional liquidity will be re-deployed into interest-earning assets leading to a slight lift in net interest margins of banks by 3 bps. Secondly, this can ease the upward pressure on deposit rates.
Economists at Bank of America Securities India said that this CRR cut is the first sign of repo easing in February.
“With November CPI likely to come in below 6 percent and prices will soften more in December, we maintain our rate cut call beginning in February, and continue to expect 100 bps cuts in the cycle, given a durable alignment of headline CPI close to 4% through 2025,” they said.
However some economists are seeing the easing cycle to be moving longer with the first action beginning in the April policy review saying the central bank has upwardly moved its inflation forecast by 30 bps to 4.8 percent for the current fiscal while steeply revised downwards its growth forecast.
“The RBI forecasts suggest improvement in economic momentum with higher CPI forecast for the full year. We expect the RBI to enter the easing cycle only from April,” said Sujan Hajra, chief economist at Anand Rathi Stock Brokers.
Smartly, Madhavankutty G, group chief economist at Manappuram Finance, doesn't expect a rate cut this fiscal as growth concerns have been adequately addressed in the policy. MV Rao, chairman of the Indian Banks Association, said the 50 bps cut in CRR is a welcome measure as it is expected to infuse Rs 1.16 trillion into the system and banks will have additional resources for lending to the productive sectors.
“The CRR reduction will also result in lower cost of funds for banks which would help to keep the interest rates benign,” Rao said.
On the regulatory front, hike in the ceiling on interest rates on foreign currency non-resident bank deposits for different tenures will help to attract some additional resources during the remaining period of the fiscal, he said.