RBI MPC: CRR cut, dovish signals in offing
The Reserve Bank of India (RBI)-led Monetary Policy Committee (MPC) meeting is taking place against the backdrop of a marked slowdown in India’s growth momentum and inflation breaching the central bank’s tolerance threshold. While economists expect the MPC to hold rates on Friday and continue to strive to bring inflation down to the 4 per cent target, they expect the RBI to cut the Cash Reserve Ratio (CRR) or conduct Open Market Operation (OMOs) purchases to infuse liquidity.
The tone of the policy is likely to be dovish. Most expect the central bank to now cut rates in February policy. The central bank is also likely to change its projections for both inflation and GDP as inflation has been higher than its forecast for Q3 while GDP print has come much below expectations in the second quarter. The RBI governor-headed six-member MPC has been holding three-day deliberations starting December 4 and would announce the outcome on December 6 (Friday).
Sonal Bandhan, economist at Bank of Baroda, said, “A CRR cut or OMO can be a double-edged sword in the absence of a repo rate cut. First, it will provide liquidity to the system. Second, it will indicate to the market that the central bank is easing conditions, which will be a positive signal for the market.”
CRR is the percentage of the bank's total deposits that is required to maintain in liquid cash with the RBI as a reserve. At present, it is set at 4.5 per cent. A CRR cut will help banks to lend more and boost economic growth. On the other hand, OMO is the sale or purchase of government bonds by the RBI to regulate the money supply in the market.
According to Harsimran Sahni, head of treasury at Anand Rathi Global Finance, if the RBI goes for the 50 bps CRR cut, that would infuse around Rs 1.15 lakh crore of liquidity in the banking system. Further, some market participants are expecting an OMO purchase announcement to bring the yield curve lower, as has been recently commented on by government officials, said Sahni.
Dragged down by manufacturing and mining, consumption, and private investments, India’s Q2 FY25 GDP came in at 5.36 per cent year on year versus the RBI’s estimate of 7 per cent, street expectations of 6.5 per cent, and the previous reading of 6.7 per cent, marking the slowest growth in seven quarters. Going by the first half of economic growth, the second half would now need to compensate at over 8 per cent to reach RBI’s estimates of 7.2 per cent, which is fairly unachievable, and the RBI will have to cut its growth expectations hereon. On the other hand, retail inflation rose to a 14-month high of 6.2 per cent (above the MPC’s 6 per cent upper tolerance level) in October from 5.5 per cent in September. The repo rate was raised by 250 basis points cumulatively between May 2022 and February 2023, and since then, it has remained unchanged at 6.5 per cent.
Radhika Rao, Senior Economist, and Taimur Baig, Chief Economist at DBS Bank, see a small probability of a rate cut on Friday, as the recent GDP miss might convince the MPC to shift to a growth-supportive stance.