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RBI's Surprise Rate Cut Sends Realty Stocks Tumbling: Is It Time to Reassess?
Business, Equities, Market News, Markets - December 9, 2024

RBI Maintains Neutral Stance: Balancing Inflation Risks and Growth Slowdown

RBI Maintains Neutral Stance: Balancing Inflation Risks and Growth Slowdown

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) extended its status quo on policy rates in its latest meeting, keeping the repo rate unchanged at 6.50%. The decision, supported by a majority vote of 4 out of 6 members, underscores the central bank’s cautious approach in managing inflation risks while ensuring sustained economic recovery. Notably, two members voted for a 25 basis points (bps) rate cut, reflecting concerns over the ongoing growth slowdown.

Inflation Concerns Shape Policy Decision
The RBI’s decision to maintain its neutral stance stems from an uptick in inflationary pressures. The central bank sharply revised its baseline Consumer Price Index (CPI) inflation forecast for Q3 FY25, raising it by 0.9 percentage points. Similarly, the full-year inflation forecast has been increased by 0.3 percentage points, highlighting persistent price pressures.

RBI Governor Shaktikanta Das reiterated the significance of price stability, emphasizing its role in supporting sustained growth. “High inflation adversely impacts consumption and investment activity,” he noted, signaling the MPC’s vigilance in managing inflation expectations. The October CPI print of over 6%—driven primarily by food inflation—further underscores the need for caution.

Revised Growth Projections Reflect Slowdown
Acknowledging weaker-than-expected economic performance in the first half of FY25, the RBI lowered its full-year GDP growth forecast from 7.2% to 6.6%. The second quarter witnessed a seven-quarter low in growth, prompting a recalibration of projections.

Despite this, the RBI projects a rebound in the latter half of FY25, with real GDP growth expected to rise to 7% in H2 FY25. Governor Das expressed confidence in the recovery, citing early signs of improvement in high-frequency indicators such as rural demand, government consumption, and external trade.

Liquidity Measures to Support Growth
In a move to address liquidity challenges, the RBI announced a 50 bps reduction in the Cash Reserve Ratio (CRR), bringing it down to 4% of banks’ net demand and time liabilities. This measure, last implemented in April 2022, is expected to inject approximately ₹1.16 trillion into the banking system.

This liquidity infusion aims to counter tightness arising from the RBI’s dollar sales to stabilize the rupee. Current estimates suggest a durable liquidity surplus of ₹1.88 trillion, significantly lower than the ₹4.88 trillion recorded in early October.

The CRR cut complements other liquidity-enhancing measures, such as raising the ceiling rate on Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits by 1.5% above the reference rate until March 2025. This move seeks to attract higher capital inflows amidst declining foreign portfolio investments (FPIs) and net foreign direct investments (FDIs).

Inflation and Growth Outlook
Inflation Trajectory:
The RBI’s revised inflation projections signal a cautious outlook. Headline inflation is expected to average 5.7% in Q3 FY25, up from the previous estimate of 4.8%. Over the subsequent two quarters, inflation is projected to moderate to 4.55%, before aligning with the RBI’s 4% target in Q2 FY26.

Food inflation, a key driver, is anticipated to ease with the arrival of the winter crop and improved supply chain dynamics. However, the potential for second-round effects from elevated food prices remains a concern. Surveys indicate that input and selling prices could firm up in Q4, necessitating close monitoring of inflation data in the coming months.

Growth Prospects:
Despite the downward revision in growth forecasts, the RBI remains optimistic about a recovery. Factors supporting this outlook include robust Kharif production, favorable Rabi crop prospects, and an uptick in investment activity.

High capacity utilization in the private manufacturing sector and the government’s fiscal space for increased capital expenditure are expected to bolster growth. Additionally, resilient global trade and buoyant services demand are likely to sustain external and urban consumption, although geopolitical and geo-economic uncertainties pose risks.

Policy Implications and the Road Ahead
The MPC’s cautious approach suggests that policy easing in the February 2025 meeting will hinge on inflation and growth dynamics. With inflation projected to remain above the 4% target until mid-2025, any rate cuts will depend on a durable reduction in price pressures.

The infusion of durable liquidity through the CRR cut provides the RBI with the flexibility to monitor macroeconomic conditions. Financial conditions remain supportive, as evidenced by strong bank credit growth surpassing nominal GDP growth and robust credit deployment across key sectors.

The National Statistical Office (NSO) will release advance GDP estimates before the next MPC meeting, offering critical insights into underlying economic momentum. While the baseline trajectory suggests room for a cumulative 50 bps rate cut under a neutral stance, persistent inflationary pressures could delay monetary easing. Conversely, if growth underwhelms, the MPC may adopt an accommodative stance, potentially enabling up to 100 bps of rate cuts over the next year.

Conclusion
The RBI’s latest policy decision reflects a balanced approach, prioritizing inflation management while addressing growth concerns. By maintaining a neutral stance and implementing targeted liquidity measures, the central bank aims to navigate a challenging macroeconomic landscape. The trajectory of inflation and growth in the coming months will be crucial in determining the MPC’s future course of action. For now, the RBI’s cautious optimism provides a foundation for sustaining economic recovery amidst global uncertainties.

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RBI's Surprise Rate Cut Sends Realty Stocks Tumbling: Is It Time to Reassess?
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - October 7, 2024

RBI’s October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks

RBI’s October MPC: Rate Status Quo Likely Amid Persistent Inflation Concerns, Global Risks

India’s Monetary Policy Committee (MPC) is set to reconvene this week, marking the first meeting for its three new external members: Ram Singh (Director, Delhi School of Economics), Saugata Bhattacharya (veteran economist), and Nagesh Kumar (Director, Institute for Studies in Industrial Development). Given their fresh appointments, all three are expected to follow the Reserve Bank of India’s (RBI) house view on rates, at least initially, as noted in a recent Bank of America report. While the new members lack any known rate biases, newcomers traditionally adopt the majority stance in their early days.

This is significant because it suggests that the RBI is likely to maintain the status quo on rates for the tenth consecutive policy meeting. This pattern aligns with Governor Shaktikanta Das’ cautious stance, particularly on inflation, which remains a key concern for the central bank’s policymakers.

Despite headline inflation falling below the RBI’s medium-term target of 4%—with CPI inflation at 3.65% in August, slightly up from July’s 3.6%—the central bank continues to exercise caution. The RBI’s reluctance to declare victory over inflation stems largely from persistent food price pressures. Governor Das, in the minutes of the August MPC meeting, underscored that while the base effect has helped lower headline inflation, food prices continue to pose challenges, and inflation expectations among households are rising. Therefore, monetary policy needs to remain vigilant to the risk of food price pressures spilling over into core inflation.

Adding to these inflationary concerns are risks posed by the geopolitical tensions in the Middle East. India is one of the world’s largest importers of crude oil, and escalating conflict in the region, particularly between Israel and Iran, could disrupt oil supplies and send prices skyrocketing. This could increase India’s oil import bill, which would, in turn, fuel inflation. Although crude oil is currently trading below the RBI’s assumed $85 per barrel average for FY25, any significant upward movement could complicate the inflation outlook. The central bank will undoubtedly factor this geopolitical risk into its deliberations.

Inflation is not the only concern for the MPC, however. Economic growth, while improving, remains below potential. Although India’s economy has shown some signs of recovery, unemployment continues to rise, and small businesses are grappling with high borrowing costs. Small and medium-sized enterprises (SMEs), in particular, are struggling with rising interest payments, and there are growing concerns about asset quality in the SME sector. In light of these challenges, there is a strong case for the RBI to begin cutting interest rates to stimulate growth.

The RBI, however, faces a dilemma. On the one hand, inflation pressures, especially in food and core inflation, suggest the need for a cautious approach to rate cuts. On the other hand, the economic reality on the ground—rising unemployment, underwhelming growth, and financial strain among small businesses—argues for the central bank to shift its focus toward supporting growth.

The recent 50 basis point (bps) rate cut by the US Federal Reserve will also be a topic of discussion at the upcoming meeting. While the RBI Governor has consistently maintained that the Fed’s actions do not dictate India’s rate policy, the reality is that central banks around the world, including India’s, cannot fully ignore rate moves in major economies like the US. The Fed’s rate cut may influence the MPC’s thinking, particularly if global economic conditions continue to weaken.

In summary, while the October meeting is likely to result in a rate status quo, the groundwork is being laid for a potential rate cut in the next few months. With inflation pressures still present but stabilizing, and economic growth faltering, the RBI will likely need to pivot toward growth support soon. However, much will depend on how inflation, particularly food prices, evolves in the coming months, and how global risks, such as the Middle East conflict and US monetary policy, unfold. If inflationary pressures subside, a rate cut could be on the horizon by the end of the year.

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RBI's Surprise Rate Cut Sends Realty Stocks Tumbling: Is It Time to Reassess?
Business, Equities, Expert Views, Investor Forum, Market News, Markets, Research, Research Reports, Result Updates - December 13, 2023

Policy watch: RBI holds rates, Moderates growth forecast for 2024

Policy watch: RBI holds rates, Moderates growth forecast for 2024
Introduction:

The Reserve Bank of India (RBI) has concluded its latest monetary policy review with a cautious yet optimistic stance as the country prepares to welcome the New Year. The central bank, while remaining vigilant to emerging economic challenges, has taken steps to support growth and maintain stability in the financial system. This report provides an overview of the key highlights from the recent RBI policy announcement and analyses the potential implications for the Indian economy in the coming year.

As the global economic landscape continues to evolve amid ongoing uncertainties, central banks play a crucial role in shaping monetary policies that balance growth objectives with inflation control. The RBI, in its recent policy review, has demonstrated a nuanced approach that seeks to address the challenges faced by the Indian economy while fostering a positive outlook for the upcoming year.

Key Highlights of the RBI Policy:

 Repo Rate Unchanged at 5.9%: The RBI has decided to keep the repo rate unchanged at 5.9%, signalling a steady approach to monetary policy. This move aims to provide stability to the financial markets while supporting economic recovery.
 Policy Stance remains “Withdrawal of Accommodation”: The central bank has maintained its policy stance, signalling a commitment to gradually withdrawing accommodative measures. This decision suggests a cautious approach, balancing the need for economic support with concerns about potential inflationary pressures.
 Inflation Projected to Moderate to 4% in Q4 FY24: The RBI’s inflation outlook anticipates a moderation to 4% in the fourth quarter of the fiscal year 2023-24. This projection reflects the central bank’s attention to inflation dynamics and its efforts to ensure price stability in the economy.
 Growth Forecast Revised Downward to 6.8% for FY24: In response to evolving economic conditions, the RBI has revised its growth forecast downward to 6.8% for the fiscal year 2023-24. This adjustment acknowledges the challenges faced by the economy while providing transparency about the central bank’s expectations.
 Focus on Maintaining Financial Stability: The policy highlights underscore the RBI’s commitment to maintaining financial stability. This includes efforts to strengthen regulatory frameworks, enhance risk management practices, and ensure the resilience of the financial system in the face of potential disruptions.
 RBI to Remain Vigilant and Monitor Evolving Economic Situation: The central bank has reiterated its commitment to vigilance, emphasizing its role in closely monitoring the evolving economic situation. This proactive stance indicates a readiness to respond to changing conditions, ensuring that policy measures remain adaptable to emerging challenges.

Market Reaction:

The Indian stock market initially reacted positively to the policy announcement, with the benchmark BSE Sensex index rising over 2%. However, the gains were short-lived, and the market ended the day flat.

RBI’s Stance on Liquidity and Market Impact:

Despite refraining from introducing fresh liquidity measures, the Reserve Bank of India (RBI) has emphasized its agility in liquidity management and maintained the possibility of utilizing policy tools like Open Market Operations (OMO) Sales. The absence of unexpected announcements led to a firming of the 10-year sovereign bond yield, reaching 7.26%, while the equity markets closed just below the 21,000 marks.

The central bank’s decision to hold off on new liquidity measures signals a measured approach, suggesting a current satisfaction with prevailing market conditions. However, the emphasis on nimble liquidity management underscores the RBI’s preparedness to adapt to changing economic circumstances. The mention of OMO Sales being “not off the table” implies that the central bank retains flexibility, ready to deploy additional measures when warranted.

The market response was notable, with the 10-year sovereign bond yield experiencing upward pressure, indicating a revaluation by investors in light of the absence of immediate liquidity injections. Concurrently, equity markets closed marginally below 21,000, reflecting a cautious sentiment among market participants. The reactions suggest that investors are carefully assessing the implications of the RBI’s decision and its potential impact on economic and market conditions.

Conclusion:

In conclusion, the RBI’s recent monetary policy review strikes a careful balance between supporting economic recovery and addressing inflation concerns. Maintaining the repo rate at 5.9% provides stability, while the decision to withdraw accommodative measures reflects a cautious approach. The downward revision of the growth forecast to 6.8% acknowledges economic challenges.
Market reactions indicate investor scrutiny, with a brief surge followed by a flat close. The RBI’s commitment to financial stability and its readiness to deploy liquidity measures position the economy for resilience. As India enters the New Year, the central bank’s nuanced stance sets the stage for stability and growth amid evolving economic conditions.

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RBI Charts Course for Sustainable Growth: Inflation Control as the Key

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