RBI’s liquidity measures increases February rate cut hopes

Reserve Bank of India

The January 27 decision by the Reserve Bank of India (RBI) on steps to increase liquidity  has increased the probability of a rate cut at the February monetary policy committee (MPC) meeting, experts said.

“The liquidity easing measures also increases the probability of a repo rate cut in the upcoming February policy,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

Aditi Gupta, economist at Bank of Baroda, too said easing liquidity conditions will act as a prelude to monetary easing. “We can also expect some relief on liquidity due to a pickup in government spending as we move closer to the (financial) year end.”

The RBI kept its policy repo rate unchanged for the 11th time running at its December MPC meeting after increasing it 250 basis points (bps) from May 2022 to February 2023. Since April 2023, it has held the repo rate steady at 6.5 percent. This was done to keep a lid on the inflation rate and bring it back to the medium-term target of 4 percent.

On January 27, the central bank announced it would inject liquidity into the banking system, including a Rs 60,000-crore purchase via open market operations in three tranches, and a variable rate repo auction next month.

The RBI will also conduct a dollar-rupee buy/sell swap auction of $5 billion for a tenor of six months, on January 31.

Rate cut hopes had brightened on the back of weaker-than-anticipated growth, moderating inflation trajectory and the induction of new members in the MPC.

“Amidst decelerating inflation, a brief respite from a one-way dollar rally, signs of soft demand, and ongoing fiscal consolidation, the onus is on the monetary policy to assume a growth supportive tone,” DBS Group Research said in a report.

India’s growth is set to dip to 6.4 percent in FY25, its lowest level in four years, pulled down by a likely decline in manufacturing and investment growth, according to preliminary data released on January 7.

Prior to this, the RBI in the December monetary policy revised cut its GDP growth forecast to 6.6 percent for the current fiscal year, from 7.2 percent earlier.

“The recovery in growth in QE December from the trough of QE September has been slower than anticipated, as suggested by the mixed trend in high-frequency growth indicators and weak credit growth. Against this backdrop, we see downside risks to our QE December GDP growth projection of 6.5%,” a Morgan Stanley report said.

Primarily, inflation trending downward is also a reason that experts hope for a rate cut in February policy. The rate of inflation declined to a four-month low of 5.22 percent in December compared to 5.48 percent in the previous month, as food prices provided some reprieve.

December, however, marked the fourth consecutive month of over 5 percent inflation. Food inflation eased below 9 percent for the first time in four months, falling to 8.4 percent in December versus 9 percent in the previous month.