RBI likely to hold rates for 11th straight time: Business Standard poll

May cut cash reserve ratio, lower growth and inflation projections

Notwithstanding gross domestic product (GDP) growth plunging to 5.4 per cent in the July-September quarter, the Reserve Bank of India’s (RBI’s) six-member monetary policy committee (MPC) is unlikely to lower interest rates in its review meeting scheduled this week, according to a Business Standard poll of 10 respondents.

 

Only one respondent, IDFC First Bank, has anticipated a 25-basis-point (bps) cut in the policy repo rate.

 

After raising the repo rate by 250 bps to 6.5 per cent between May 2022 and February 2023, the MPC has kept it unchanged in its last 10 reviews.  

Most respondents, however, said both growth and inflation projections for the current financial year were likely to be revised.  

 

 

The RBI may lower its growth projection from 7.2 per cent and raise its inflation forecast from 4.5 per cent. Though interest rates are expected to remain unchanged, liquiditymanagement is likely to be an important focus of the December review, which will be announced on Friday.

 

Liquidity in the banking system has slipped into deficit, driven by increased foreign exchange interventions and temporary mismatches in government flows to the banking sector. There is a possibility of a reduction in the cash reserve ratio (CRR) requirement for banks.

 

“Given the downside growth surprise, the RBI might opt for a 25 bps CRR cut to ensure liquidity concerns do not add to growth pessimism. Also, injecting liquidity ahead of a rate cut could improve transmission,” economists Anubhuti Sahay and Saurav Anand of Standard Chartered Bank said in a note.

 

As of Thursday, net liquidity was in a deficit ofRs 9,489 crore. The banking system liquidity turned negative on November 26, after two months of surplus. Core liquidity surplus, which includes system liquidity and government balances, has dropped sharply from Rs 4.6 trillion on September 27 to Rs 1.6 trillion by November 15.

 

Madhavi Arora, lead economist at Emkay Global Financial Services, said: “A rate cut is unlikely. It’s a close call in the December policy, but they will announce some liquidity tools, and we are expecting massive revisions.”

 

The MPC had shifted its stance from “withdrawal of accommodation” to “neutral” in October.

 

The decision to keep rates unchanged would be based on the ongoing risk of food inflation, as daily retail prices, particularly for vegetables, continue to rise, according to respondents. Many economists believe a rate cut, albeit shallow, could commence from February.

 

“A vigilant, cautious approach will likely be adopted given the spike in inflation and existing headwinds,” said Achala Jethmalani, Economist at RBL Bank. “Seasonal corrections in vegetable prices will bring some relief to consumers. Food inflation would need to correct and sustain at softer levels for headline inflation to drop below 5 per cent in the second half of FY25.”

 

Consumer Price Index (CPI)-based inflation climbed to a 14-month high of 6.21 per cent in October, up from 5.49 per cent in September, indicating persistent price pressures across sectors.

 

Gaura Sen Gupta, economist at IDFC First Bank, said the comfort on growth had diminished significantly. “We see downside risks to our FY25 GDP growth estimate of 6.6 per cent. Meanwhile, the rise in inflation remains concentrated in food, with core inflation remaining moderate. The moderation in growth implies that the output gap would have widened.”

 

India’s economic growth slowed more sharply than expected in the July-September period of FY25, declining to a seven-quarter low of 5.4 per cent, compared to analysts’ projections of around 6.5 per cent. The slowdown, driven by industrial deceleration and weaker investment demand, has raised concerns.

 

All respondents agreed that the RBI would lower its growth forecast for the financial year to below 7 per cent. A majority also believe the inflation forecast will be revised upward.

 

“The RBI’s 7.2 per cent growth forecast was based on certain assumptions, but Q2 has been a shocker,” said Madan Sabnavis, chief economist at Bank of Baroda. “While we are optimistic about a recovery in the second half, however well we do, growth will still remain below 7 per cent,” he said. 

 

Inflation, currently forecasted at 4.5 per cent, is also set to change, said Sabnavis. “For Q3, the projection was 4.8 per cent, but it looks more likely to exceed 5 per cent. We estimate it will be around 5.2 per cent, which means the full-year forecast will likely rise slightly above 4.5 per cent.”