RBI Liquidity Measures: February Could See Rate Cut, Economists Say
While the rate cut call in February 2025 is still a close one, some policy flexibility may be exercised by the RBI, said Madhavi Arora.
The Reserve Bank of India's latest measures to ease liquidity on Monday, also paves the way for a rate cut at the Monetary Policy Committee's meet next week, according to economists.
The central bank announced various special measures, such as the purchases of open market operations, longer tenure variable rate repo auctions and interventions in the foreign exchange market, in a bid to boost liquidity in the banking system.
Easing By Stealth?
The fluidity of global dynamics is playing an important role in the RBI's conventional rate cuts, especially with INR pressures mounting, said Madhavi Arora, lead economist at Emkay. Thus, steps for liquidity management and unconventional measures, specifically gradual easing of regulatory lending norms to re-spur waning credit offtake, etc, would probably play an important role in easing the RBI stance by stealth and consequently the lending conditions in the economy, she explained.
From the rates standpoint, the immediate impact will be stabilisation in overnight rates, to keep it aligned with policy rates and to prevent tightness in financial conditions, said Radhika Rao, senior economist at DBS. The 10-year yield is likely to extend its correction, after slipping to a three-year low at the start of this week on previous OMO action, she said.
February Rate Cut Space Opening Up?
More easing will be needed given the continued pressure over the next few months, said Upasna Bhardwaj, chief economist, at Kotak Mahindra Bank. The liquidity easing measures also increases the probability of repo rate cut in the upcoming February policy, she said.
"While the rate cut call in February 2025 is still a close one, we admit some policy flexibility may be exercised by the RBI," Arora said. The recent dollar weakness has given some breathing space to emerging markets currencies, including the INR, which could also provide some wiggle room to the RBI on its monetary reaction function, Arora said. For any cuts to be effective on transmission, a better banking system liquidity is pertinent, she added.
More so, with the RBI now turning more judicious on its INR defence, the policy trilemma could tilt more toward letting the INR find its equilibrium to some extent, and provide some policy flexibility to the RBI on rate settings in general, according to Arora.
Amid decelerating inflation, a brief respite from a one-way dollar rally, signs of soft demand, and ongoing fiscal consolidation, onus is on the monetary policy to assume a growth supportive tone, said Rao, who expects a 25 basis points rate cut in February at the next policy meet.
While the new members of the monetary policy committee have openly conveyed little on their policy bias, recent actions suggest that the path is being paved for monetary easing, she said.
