Gloomy outlook for growth and inflation may dampen market sentiment

The RBI’s MPC held the repo rate unchanged and continued with its neutral monetary stance, scheduling a CRR cut to be implemented in two tranches. However, the outlook was gloomy and may be a dampener for sentiment.

 

The MPC warned about rising volatility in global markets, and cut its GDP outlook for financial year 2025 (FY25) by 60 bps although it hinted at possible recovery from Q4FY25 onwards. While the decision to hold the policy repo rate at 6.5 per cent was taken 4-2 with two members wanting a cut, the decision to continue with the ‘neutral’ monetary policy stance was unanimous.

 

Inflation in October has risen significantly with upticks in food inflation and also in core inflation. The central bank’s surveys indicate businesses expect input costs to rise, but businesses also expect to be able to pass on most of the input cost increases. If food inflation softens as expected, and fuel costs don’t rise, the central bank expects CPI to stay below the 6 per cent mark through Q3 and Q4 and even stay below 5 per cent through H1FY26.

 

Overall, the RBI expects inflation in FY25 to be around 4.8 per cent, 30 bps above prior expectations. 

 

 

RBI Governor Shaktikanta Das pointed out that a rising US dollar has resulted in large capital outflows from emerging markets and volatility in equity markets. The rupee has dropped to below Rs 84.75 and foreign portfolio investors (FPIs) have sold heavily through October and November though they have been net buyers in December. If growth falls further, the Governor says policy support may be required.

 

Das also said, “The outlook is clouded by rising tendencies of protectionism which have the potential to undermine global growth and push inflation higher.”

 

This is a diplomatic way to reference the tariff policies of the upcoming Trump Presidency, which takes charge in January. If Trump does impose big customs duties on US imports as he has promised, and also cuts visa allotments for skilled labour, it will clearly impact India badly. There could be issues for Indian exporters and may be rising costs and challenges for the IT services industry.

 

Since higher customs duties will result in the US suffering inflation, it’s also possible the US Federal Reserve will review its stated policy of policy rate cuts. The Fed cut the Fed Funds rates by 75 bps in CY24. If it holds in ’25, the US dollar is likely to strengthen. The RBI has to be braced for this. It has already spent significant sums to keep the rupee inside its desired band. 

 

Economists are divided on the possibility of a repo rate cut in Feb ’25. It could happen if growth stalls, and/or the CPI drops to 4 per cent. The Dec ‘24 CRR cut will push an estimated Rs 1.1 trillion of liquidity into the economy, but this may not be enough if household consumption remains weak.

 

The market didn’t react very much to the MPC, implying investors were braced for a no-cut scenario. But the Bank Nifty lost a little ground and so did the Nifty Financial Services Index indicating that traders may see this update as bearish. It will be interesting to see the response of the FPIs to the MPC. The Fed will release a set of economic projections in mid-December and it has an FOMC meeting in late January. Changes in its stance, if any, will certainly influence the RBI.