RBI Has Limited Room For Further Easing, Says UBS After Sharp Rate Cut, Cash Boost
To provide ample liquidity to support the policy transmission, the central bank reduced the cash reserve ratio to 3% from 4%.
After the Reserve Bank of India reduced the benchmark repo rate more than expected and cut the reserve ratio requirement to infuse cash into the banking system, there appears to be limited room for further easing. The central bank changing stance to 'neutral' from 'accommodative' also support this case, according to UBS Global Research.
The RBI reduced the repo rate by 50 basis points to 5.5% at the end of its three-day policy meeting on June 6. So far, cumulatively, the central bank delivered 100-bps reduction.
Governor Sanjay Malhotra also said that after having reduced the repo rate by 100 bps, there are limited spaces left now to support growth. Hence the Monetary Policy Committee changed the stance to neutral, UBS Global Research said.
To provide ample liquidity to support the policy transmission, the central bank reduced the cash reserve ratio to 3% from 4%. This will come into effect in four tranches effecting 25 bps each, the brokerage said. This reduction will inject Rs 2.5 lakh crore of liquidity in Indian banking system by December 2025.
Meanwhile, the system inter-bank liquidity is already in surplus 1% of net demand and time liabilities as of June 4, while call rate has been hovering at the lower end of Liquidity Adjustment Facility corridor, the brokerage said.
RBI kept its real GDP growth projection for financial year 2026 unchanged at 6.5% year on year, while it lowered the consumer price index based inflation to 3.7% on the year. UBS Global Research sees CPI inflation to remain 3.5% in the current financial year because of benign monsoon, good agricultural output, and lower crude oil prices in the international markets. Moreover, China flooding Indian markets because of the excess capacity may result in a disinflationary impulse.
UBS Global Research believes that RBI has met its terminal repo rate projection of 5.5%. With the central bank's neutral policy rate assumption of 1.4–1.9% and their inflation estimation of 3.7%, the implied nominal repo rate could range between 5.1–5.6%.
However, UBS Global Research sees that the central bank has kept a room for a 25-bps rate cut in the future in case global uncertainty heightened.
