RBI MPC provides helping hand to boost GDP growth, next repo rate cut likely in June

RBI Monetary Policy

By Deepak Agrawal, CIO-Debt at Kotak Mahindra AMC

The Monetary Policy Committee (MPC) under the new RBI governor Sanjay Malhotra has unanimously decided to reduce the repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25% with immediate effect. As a result, the standing deposit facility (SDF) and marginal standing facility (MSF) reduced to 6.00% and 6.50% respectively. Moreover, the MPC continued with the “neutral” (unchanged) stance.

The real GDP growth forecasted by RBI for FY2025-26 stood at 6.70%. RBI has revised its FY2024-25 GDP growth to 6.4% in line with advance estimate of NSO. The slowdown in growth (5.40% in Q2FY2024-25) is attributed to slower private consumption and investment growth. Though the high frequency indicators suggest that the growth has bottomed out in Q2FY2024-25 and we expect the same to revive in the second half of the current financial year but we expect the full year GDP growth for FY2024-25 may be tad lower than RBI revised forecast of 6.40^%. The RBI forecasted the next year growth (FY2025-26) at 6.70% with quarterly growth as follows: for Q1:6.70%, Q2:7.00%, and 6.50% each in Q3 and Q4 with risks evenly balanced.

After the October 2024 inflation data over 6%, the inflation stood at 5.48% and 5.22% in November 2024 and December 2024 respectively. Moreover, the food inflation has fallen to 8.39% in December 2024 and the same is expected to soften given a good kharif production and favourable rabi crop prospects. However, the RBI expect the core inflation to rise but is expected to remain moderate. RBI has projected the FY2024-25 headline inflation at 4.80% (same as the last monetary policy) and 4.40% in Q4FY2024-25. The headline CPI inflation for FY2025-26 is projected at 4.20% with 4.50% in Q1, 4.00% in Q2, 3.80% in Q3 and 4.20% in Q4. The upside risk to inflation remains due to rising uncertainty in global financial markets, volatile energy prices, and weather events due to climate change. RBI Governor also mentioned that RBI will look to use the flexibility embedded in the flexible inflation- targeting (FIT) framework.

The system liquidity had remained in surplus from July 2024 to November 2024. However, the same turned to deficit during December 2024 and January 2025 due to advance tax payments, capital outflows, forex operations and increase in currency circulation in January 2025. The RBI in January undertook various measures to combat liquidity deficit which includes long-term variable rate repo auction on February 7, purchase of government securities through open market operations (OMO) purchase and a forex buy-sell swap. However, the RBI did not take any incremental measures in today’s meeting to infuse liquidity but has mentioned that RBI will take proactive measures to provide transitory as well as durable liquidity.

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Deepak Agrawal

Chief Investment Officer (Debt Fund)|Kotak Mahindra Asset Management Company

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On earlier published draft circular for liquidity coverage ratio (LCR) for the Banks, the RBI Governor mentioned that enough time will be given to ensure smooth implementation & transition and final guidelines (once published) is likely to be implemented only on or after March 2026. This will provide some relief to banks and will also not aggravate the liquidity stress (on account of G-sec purchase by banks) which could have happened had the guidelines implemented by 31 March 2025.

We expect the RBI to continue with OMO purchase even after two scheduled OMO purchase of Rs 20,000 crore each on February 13 and 20, 2025. The RBI reiterated that the intervention in the forex market is to focus on smoothening excess and disruptive volatility rather than targeting any specific rate level or band for foreign exchange.

The RBI's decision to reduce the repo rate and maintaining a neutral stance aligns with our expectations. Given the current context, we anticipate an additional 25 bps cut by June 2025. After fiscally prudent Union Budget announced on February 1, 2025, RBI cut is likely to support the overall Indian economy. Moreover, the RBI is expected to maintain liquidity such that overnight rates stay close to SDF rates. Long-term G-Sec rates have marginally hardened immediately after the policy due to the unchanged stance at neutral, indicating no further commitment to future rate cuts. 10-years Indian Government Securities (G-sec) is expected to trade in the range of 6.55% - 6.75% until March 2025.

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