More than the rate cut, RBI Governor’s guidance on key issues to be tracked

Reserve Bank of India

Kanika Pasricha, Chief Economic Advisor at Union Bank of India

It is that time of the year when everyone eagerly looks at policymakers (both government and RBI) to provide a roadmap for the next year and the relevance of the Budget and RBI policy gains rises multi-fold in a slowing economy. On a positive note, the Budget, on 1st February, beautifully balanced the goal of fiscal prudence with the much-needed demand stimulus. While the consolidation of fiscal deficit in FY26 implies a negative fiscal impulse, however, income tax cuts, are likely to have a multiplier effect and help de-clog the channel of public capex push crowding in broad-based private capex recovery. With capex budget for key ministries like roads and railways kept unchanged YoY, the government has clearly passed on the baton to boost capex recovery to the private sector. That said, the impact of the demand stimulus along with other measures in the Budget (especially Deregulation) is likely to play out gradually over the coming quarters. Hence, the RBI led MPC as it meets during 5-7th February, is likely to treat the current macro backdrop as weak in a volatile world, with sustained uncertainty regarding which way will Trump finally tilt given the flip-flop seen since the last weekend.

There is a fair chance that the MPC revises lower both growth and inflation projections for the current financial year, FY25. For instance, for the quarter ended Dec’24 (Q3-FY25), the growth numbers are looking close to 6% while the MPC’s forecast is 6.8%. This implies a relatively sharp downward revision for FY25 GDP growth estimate of 6.6% (versus 6.4% advance estimate). On the inflation front, with veggie prices finally cooling in January. Hence, the inflation numbers for Jan-Mar’25 ending qtr are tracking 4% (inflation target) versus MPC’s estimate of 4.5%. On balance, macro backdrop is ripe for rate easing.

Yet, with persistent upward pressure on US Dollar and rates, do the degrees of freedom for policy easing get curbed? In this regard, the consensus is emerging that in an inflation targeting framework, FX becomes the shock absorber of global volatility. While we will closely watch out for the RBI Governor’s views on the Rupee, as he speaks for the first time on 7th February, his actions are loud and clear. Since the last MPC meeting, Rupee has seen a threshold shift from 84 to 87, signalling a clear attempt to reduce pending depreciation pressures. On balance, global market volatility is the new normal and our policymakers are learning to adjust with the same.

Another area where the RBI Governor has already acted outside policy has been banking system liquidity. RBI has attempted to counter FX related liquidity outflows of ~Rs 5 lakh crore, via a combination of open market operations (OMOs), FX swaps, long-term repos, daily repos apart from the 50bps cut in cash reserve ratio (CRR). Hence, we await further liquidity assurance in this policy and also seek clarity on implementation of the revised Liquidity Coverage Ratio (LCR) guidelines due from 1st April, as banks still provisioning for the same thereby keeping short-end funding rates elevated.

In conclusion, it will be a tight ropewalk for both the government and RBI as they attempt to boost the economy and shift the “slowing growth” narrative for investors. From a policy mix perspective, the Budget has played a crucial role in boosting the demand-side growth levers, while monetary policy is likely to attempt to do the supply-side growth heavy-lifting.

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