RBI’s actions beyond a 25bps rate cut to be closely watched
While a 25bps rate cut in the upcoming RBI MPC policy is largely expected, market focus will be on the central bank’s actions beyond the rate cut, a report by Emkay Global Financial Services stated on Thursday.
The RBI is likely to continue easing liquidity through unconventional policy tools, including regulatory measures. Additionally, it may address stress in the non-sovereign money market.
The report anticipates another round of Rs 300 billion Open Market Operations (OMOs), bringing the total to over Rs 900 billion in FY25E. A cut in the Cash Reserve Ratio (CRR) remains a possibility, though a temporary reduction may not fully resolve banking sector stress.
Adjustments to the Liquidity Coverage Ratio (LCR) norms set for April 2025 and modifications to lending standards could be preferred policy tools. Furthermore, additional capital account easing measures via the FCNR route may be considered.
“Noisy food inflation” was a key driver of headline inflation in FY25, while demand slack kept core inflation subdued, according to the report. However, near-term food price pressures appear to be easing, with broad-based declines across categories. January inflation is expected to track below 4.5 percent, compared to 5.2 percent in December.
Headline inflation for Q4FY25E is projected to ease to 4.4 percent, down from 5.6 percent in Q3FY25, supported by strong Kharif output. For FY26, average inflation is expected to decline to 4.5 percent, compared to 4.8-4.9 percent in FY25.
The report noted that recent RBI measures since December marked the beginning of “easing by stealth,” a trend expected to continue. In December, normalizing the CRR to 4.0 percent added over Rs 1 trillion in liquidity, followed by additional liquidity measures amounting to Rs 1.5 trillion in January.
