RBI MPC meet: Kotak Equities bats for liquidity boost with 50 bps CRR cut amid growth concerns

The RBI is set to announce its policy decision on December 6.

Kotak, in its latest note, highlighted that the recent GDP growth slowdown increases the likelihood of early policy actions. Kotak also recommends a staggered 50-bps CRR cut by Reserve Bank of India (RBI) at its upcoming MPC meet, which would inject approximately Rs 1.2 lakh crore of liquidity, signaling the start of a monetary easing cycle. The RBI is set to announce its policy decision on December 6.

However, Kotak Equities expects the RBI MPC to keep the repo rate unchanged later this week, citing elevated headline inflation in October-November (despite core CPI, excluding vegetables, staying below 4%), RBI’s commitment to achieving final disinflation, and spillovers from adverse global conditions impacting interest rate differentials.

It noted that a repo rate cut during tight liquidity conditions could exacerbate banking stress, emphasising the need for liquidity easing measures before any rate reduction. However, given global uncertainties, Kotak expects RBI to exercise caution in selecting liquidity tools (CRR/OMO) and their timing. Additionally, it anticipates that RBI will revise its FY25 GDP growth forecast downward and raise its inflation estimate.

The Q2FY25 GDP growth slowed to a seven-quarter low of 5.4%, intensifying the policy challenge for RBI. While high-frequency indicators suggest a mild recovery in Q3FY25, Kotak projects FY25 GDP growth to fall significantly short of the RBI’s 7.2% estimate, with Kotak's forecast at 6.1% (H2FY25 at 6.2% vs RBI’s 7.4%). Growth in the second half is expected to be driven by rural demand and government revenue spending, but muted by slow public capex, waning urban demand, and global demand uncertainties.

Liquidity conditions have tightened considerably in Q3FY25, with core liquidity dropping to Rs 1.2 lakh crore from Rs 4.6 lakh crore in early October. This structural tightening has been driven by aggressive forex interventions ($35 billion) and festive-linked currency outflows (Rs 70,000 crore). Without liquidity easing measures, core liquidity is likely to dip into deficit territory in Q4FY25, the report added.