RBI Monetary Policy: The task of new governor Sanjay Malhotra for his first RBI monetary policy is crucial than expected. He faces conundrums such as high inflation, intense depreciation of rupee, slowed economy and chaotic global uncertainties. His first monetary policy will be vital as many would expect the outcomes to ensure a balance between liquidity and to tame weakening of rupee against dollar. A month ago, the scenario of a rate cut on February 7, seemed like the most favourable option from RBI. However, now opinions are of mixed and many are suggesting that yet another status quo for 12th time in a row, would be better considering the fragile global conditions thanks to Donald Trump's policies and tariff plans that have put global trade at risk.
What has changed from the previous policy till February 6, 2025?
The first and foremost change is the appointment of new governor Sanjay Malhotra who takes over from previous Shaktikanta Das. This will be Sanjay's first monetary policy. Malhotra has chaired the three-day policy meeting of six-member MPC from February 5th, and its outcomes will be announced on February 7th.
Inflation: India's consumer price index (CPI) has eased for the second time in a row to 5.22% in December 2024 from previous month's 5.48%. This is also the second consecutive month that CPI has stayed below RBI's upper tolerance limit after hitting 6.21% in October 2024. But inflation continues to stay above RBI's main objective of 4% since September last year.
GDP: India's gross domestic product (GDP) growth has slowed the most since December 2022, to a staggering 5.4% in September quarter of FY25. Trading Economics data revealed that the drop consolidated India's softening momentum after enjoying a prolonged period of being the fastest-growing major economy in the world. The economic survey of 2024-25 expects GDP growth at 6.4% for FY25, which would become the slowest growth in four years. While the survey predicted FY26 GDP growth between 6.3-6.8%.
Rupee: Prior to the RBI policy outcomes, the rupee extended its record low to 87.54 against the US dollar due to the increased demand in the greenback. The rupee has taken a massive blow this week since concerns related to US tariff policies heightened.
Repo Rate: RBI under Shaktikanta Das's leadership had kept the repo rate unchanged for the 11th time in a row to 6.5% between February 2023 to December 2024 monetary policies. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. The repo rate was increased by 250 bps between May 2022 to February 2023 after extreme inflationary pressure escalated due to Russia's invasion of Ukraine. RBI was not alone, all other central banks globally were pushed to hike key fund rates. However, unlike RBI, the Fed and central banks in other economies have eased the rate cycle significantly in 2024.
US Fed Status Quo: The Jerome Powell-led FOMC committee has announced its first monetary policy under Donald Trump's 2.0 in the White House. Owing to uncertainties surrounding Trump's policies, the US Federal Reserve paused interest rates at 4-1/4 to 4-1/2 per cent on January 30, 2025. This also comes after 100 bps rates were cut in 2024. FOMC continues to signal that inflation remains elevated.
Is It the Right Time For RBI To Cut Rates On February 7?
According to Morgan Stanley, although growth was tracking a tad weaker than expected in the December quarter, the trend in inflation is in line with the Budget, which continued on a fiscal consolidation path.
Morgan Stanley believes that as such, domestic growth and inflation dynamics warrant easing and will likely outweigh the concern of volatility stemming from external factors in the policy on February 7.
It added, "We thus expect the RBI to provide support through different levers to ease liquidity conditions, regulatory burdens, and policy rates. We expect the RBI to build on the measures announced previously to improve liquidity through a rate cut in the next policy preview."
Brokerage Sharekhan also believes the same. It said, the RBI has also taken steps to ease liquidity crunch and is expected to follow it up with a rate cut in the forthcoming monetary policy review meeting. The coordinated efforts by the central government and the RBI are expected to provide the required impetus to an upswing in consumption.
Shishir Baijal, Chairman and Managing Director, Knight Frank India believes that RBI may consider turning the policy rate cycle given the Union budget's emphasis on reviving consumption to support economic growth.
Baijal added, "This potential rate cut will align with the budget's objectives of stimulating economic activity while managing a prudent fiscal position, which provides comfort on currency and inflation fronts. Additionally, the government's balanced borrowing plan and efforts to enhance liquidity could support a favourable environment for such a rate cut."
According to him, a rate cut will be beneficial for the real estate sector as it will make borrowings more affordable for the home buyers and reinstate consumer sentiment, particularly in the lower and mid-income segments. It will also potentially enhance liquidity in the banking system making it easier for developers to access financing for their projects.
Other experts believe that the Budget's goal for driving consumption comes as a positive factor for RBI. Mandar Pitale- Head Treasury, SBM Bank India said, the upcoming RBI February Monetary Policy review is coming against the backdrop of the Government delivering growth supportive budget with fiscal prudence. Conservative Fiscal projections are instrumental in providing the necessary space for monetary easing. At the same time, the fiscal impulses provided in the budget are growth supportive in the medium term and thus will provide comfort to MPC in focusing on "inflation-centric" policy measures.
However, Pitale also added that while MPC is expected to take cognizance of the recent bouts of rupee depreciation and the resultant risk of imported inflation in the medium term, the comfort on the near-term trajectory of inflation and the need for giving further push to growth supportive measures announced in the budget is expected to weigh on the decision making on rate action.
Taking all these factors into consideration, Pitale said, "It would be prudent to start the rate easing cycle in the forthcoming FEB MPC meeting with 25 bp cut retaining a neutral stance with a commitment to maintaining adequate durable systemic liquidity necessary for credit pick up."
Suresh Darak, Founder, Bondbazaar who expects RBI to cut rates by 25 bps on February 7 due to the government's focus on fiscal prudence, also pointed out that this move is largely priced in, so we don't anticipate significant market movement.
Darak believes the real focus will be on the RBI's future guidance, particularly their strategy for managing liquidity amidst currency depreciation. The RBI's outlook on liquidity and currency will be crucial in shaping market sentiment.
Unlike the above experts, Amar Ambani, Executive Director, of YES SECURITIES believes differently.
Ambani said, "We do not anticipate the RBI cutting rates in the upcoming policy meeting. While inflation is showing signs of easing and domestic growth requires support, global conditions remain unfavourable for a rate cut at this stage. With China imposing retaliatory tariffs on the US, the RBI is likely to adopt a wait-and-watch approach regarding further developments in the trade war."
Yes Securities Ambani added, "Shipping costs are already elevated, and an immediate rate cut could widen the interest rate differential between the US and India, exerting additional pressure on the INR, which has already seen significant depreciation. The inflationary impact of this depreciation is yet to fully materialize. Moreover, the US Federal Reserve is unlikely to cut rates before April/May 2025."
The case for supporting growth will only gain traction once INR stability is ensured. Having said that, on the growth front, the RBI has already provided liquidity support through a CRR cut and OMOs, while the recent Union Budget introduced measures to boost consumption, in Ambani's opinion.
In the first policy meeting under the new Governor, Ambani said, "we expect the RBI to continue addressing the liquidity deficit through additional measures. We see a possibility of a shift in policy stance from the current 'neutral' position to 'accommodative'. This will offer enough reason for the Indian stock market to rejoice."
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