RBI Policy: Central Bank Likely To Only Start Rate Cuts In February, Say Brokerages

The Reserve Bank of India is seen holding its repo rate for the eleventh straight meeting in December and brokerages do not expect a rate cut until February. However, they expect the regulator bank to act towards liquidity easing through unconventional policy tools.

BofA's report said that despite seeing a very weak GDP growth print, the RBI appears set to be on hold, but the MPC decision could be more contested than previous meetings, with more than one members voting for a rate cut.

"Still, the pivot to a neutral stance in October does provide the space to take more growth supportive actions, and this could come in the form of forward guidance on rate cuts, liquidity injection to manage front end rates, and even contemplate a reduction in cash reserve ratio from its current 4.50% level, if deemed necessary," it said, adding that this would also mean a shift in recent policy guidance is on the cards, but rate cuts appear only likely in February MPC, given that CPI inflation remains above the tolerance band.

"If CPI comes off sharply, the RBI could contemplate an intermeeting move to cut rates, but the bar for that step remains high," BofA said.

On similar lines, Emkay Research said the massive GDP undershoot has meant that the policy trade-offs have become even more acute as the economy looks to be in a stagflationary state. "Even as the RBI’s growth/inflation forecast will see significant downward/upward revisions, an immediate rate cut may not be easy for the MPC to justify, especially as their commentary has been assertive on durable disinflation being the primary mandate," it said.

The brokerage also expects a CRR reversal to pre-Covid 4% level, implying an infusion of Rs 1.2 lakh crore at a time when core liquidity may steadily move to a deficit ahead with unsterilised forex intervention and CIC leakages. "We watch for easing regulatory-lending norms ahead to revitalize the waning credit offtake," it said.

If and when the USD stabilises or retracts, EMs such as India may find an opportunity to ease, said HSBC. "We expect two repo rate cuts of 25 bps over February and April, taking the repo rate to 6%," it said. "Our real rate math suggests that this will be a shallow rate cutting cycle of 50 bps."

According to the brokerage, it is time to act strategically but even before that, the RBI may infuse domestic liquidity, via a possible 50 bp CRR cut on 6 December--and over the next few months also bring out a host of other instruments to infuse the necessary liquidity.

Morgan Stanley said it expects recovery in growth in second half, driven by agricultural output and higher government spending – especially capex-oriented, which improves the multiplier effects. "We will be tracking high-frequency monthly data, alongside trends in fiscal spending and credit growth to assess the cyclical factors," it said.

The key to track, according to the brokerage, is the trend in food prices, the outlook for which is improving, driven by seasonal factors which aid lower vegetable prices and higher summer crop output. "Further, the trend in core WPI needs to be tracked to assess the impact on core CPI," it said.

On liquidity, the brokerage said to ensure financial conditions do not tighten, the RBI should add durable liquidity though OMO purchases. "Though it's not our base case, the central bank could also opt for a CRR cut, which would also help to add liquidity," it said.

"Despite the GDP growth print being significantly weaker than RBI's expectations, we think primacy of inflation will prevail for now," Barclays said in a note.

A research note by Citi said that elevated inflation makes a December rate cut unlikely, but there could be an explicit acknowledgement that growth needs support, too. "This would cement our February rate cut view." However, the RBI could consider a CRR cut in December, as a step toward easing, while also loosening recent pressure on banking system liquidity, the note said.