The Executive Summary of the Report is as follows:
Key rates kept unchanged even as moderating growth outlook pushes the RBI to a CRR cut
The RBI's MPC voted 4-2 (previously: 5-1) to keep the repo rate at 6.50%, with no adjustments to the SDF and MSF rates. The stance was also maintained as "Neutral", as Mr. Das continued to be stern on maintaining price stability calling it an essential ingredient to ensure sustainable growth. At the same time, the owing to a sharp correction in the growth forecast, the RBI chose to cut CRR by 50 bps to 4% (pre-COVID level), pumping in Rs, 1.16 trn of liquidity into the system. This is much needed in the wake of INR outflow in recent weeks draining the system and expected outflows in late Dec'24 owing to taxes. With the current reduction in global volatility a calm before the storm when Mr. Trump assumes power in Jan'25, the RBI will maintain caution.
A lower-than-expected GDP print in H1FY25 meant that growth forecasts were slashed even as due optimism was maintained for a rosier H2
RBI sharply lowered its growth projection for FY25 to 6.6% (previous: 7.2%), factoring in the reality revealed by the print of Q2FY25. The RBI projects a recovery in H2FY25 numbers. This mirrors our expectations of 6.6% real GDP growth for FY25. We too foresee some optimism in H2, contingent on HFIs maintaining their festive momentum, resumed government capex, a pick-up in rural demand and recovery in industry activity in Q4. External volatility remains a risk, and we expect its major impact to pan out in FY26
Food prices push a sternly inflation committed RBI to raise its projections, amid a 6.2% Oct'24 CPI print at 14-month high and above RBI tolerance
With the Core moving from 3.4% in Aug'24 to 3.7% in Oct'24, it seems to have bottomed out and stubborn food prices continue to outpace CPI, potentially edging up Core via second round effects. Even as positive domestic indicators such as a good rabi season, ample rainfall, and seasonal correction in vegetable prices might tame food prices in the ensuing quarters, another risk emerges on the imported front with a wave of global protectionism and brewing tariff war. Accordingly, RBI raised its inflation projections for virtually all quarters, with FY25 inflation projection sharply raised by 30 bps to 4.8%. RBI projects inflation to only reach target in Q2FY26. Based on these old and fresh upside risks, we raise our FY25 inflation estimates from 4.7% to 4.8%, in tandem with RBI projections.
Global geopolitics remains a key variable - US Fed entered wait and watch mode, delivering an anticipated 25 bps cut in Nov'24 policy
Market volatility is prevalent, despite a cumulative of 75 bps of cuts instituted by the Fed, US 10Y has moved 50 bps upwards since 18 Sep'24 (first cut)! It oscillated in the range of 3.7-4.45% over the same period. While the labour market continues to soften with in-check inflation, despite disjointed GDP prints, easing monetary actions by the Fed are expected to support India's rate cutting cycle too. Going forward, the outlook is clouded by rising tendencies of protectionism which have the potential to undermine global growth and push inflation higher.
Liquidity becomes a key policy tool as supply-led inflation meets slow growth - CRR cut a step in the right direction
RBI cut the CRR by 50 bps to pre-COVID levels of 4.0%, and the same shall be instituted in two equal tranches of 25-bps each commencing on 14 Dec'24 and then culminating on 28 Dec'24 respectively. The same is expected to flush Rs. 1.16 trn in the banking system which faced minor deficits towards Nov'24 end due to FX and tax outflows after flush liquidity throughout Nov'24 (averaging Rs. 1.5 trn). Direct tax outflows in Dec'24, and continued FPI selling had the potential to constrain rupee liquidity and CRR cut will be warmly welcomed by the markets.
External sector to be a monitorable as INR hits record lows, capital flows change direction, and forex buffers gradually reduce. FCNR(B) deposit rates raised
In order to stem foreign outflows, the RBI decided to raise interest rate ceilings for 1-3 years and 3-5 years maturity by 150 bps to overnight ARR + 400 bps and overnight ARR + 500 bps respectively until 31 Mar'25. We believe that in a deteriorating global pitch, MPC might be factoring in the risks of sharper FII outflows (and thereby currency movements), while pushing the easing cycle forward knowing that the forex reserves only 'buffer' to some extent.
Outlook on Union G-sec yields remains titled to the downside
We expect 10Y is likely to remain in the 6.5%-7.0% range, with volatility influenced by global factors despite India's strong fundamentals. Short-term yields, influenced by liquidity to a greater extent, maintain temper as markets re-aligned expectations of ensuing RBI policy actions on liquidity. We believe the RBI and Union have sufficient tools to stabilize the economy, especially in FY26 when the risks are likely to peak. |
