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RBI's Surprise Rate Cut Sends Realty Stocks Tumbling: Is It Time to Reassess?
Market News - June 7, 2025

RBI Cuts Rates: Home Loans Cheaper, FDs at Risk!

RBI Cuts Rates: Home Loans Cheaper, FDs at Risk!

With a 50-basis point reduction in repo rate, the RBI eases the cost of borrowing while adopting a ”neutral” stance, signalling a shift in monetary strategy amid slowing inflation and stable growth.

Summary:
In a significant and unexpected move, the Reserve Bank of India (RBI) slashed the repo rate by 50 basis points to 5.5% during its Monetary Policy Committee (MPC) meeting held on May 5, 2025. The decision, led by Governor Sanjay Malhotra, marks the third consecutive rate cut this year and reflects the central bank’s response to easing retail inflation and creating a stable macroeconomic environment. The reduction is expected to reduce EMIs for retail borrowers but may also impact fixed deposit returns for conservative investors.

A Surprise ”Jumbo” Move: RBI Cuts Repo Rate by 50 bps
In a surprising and decisive action that took the market by surprise, the Reserve Bank of India (RBI) declared a 50 basis point decrease in the benchmark repo rate, bringing it down from 6.0% to 5.5%. This is the steepest single cut in the repo rate since the pandemic and takes the cumulative rate reduction in 2025 to 100 basis points. The decision was taken unanimously by the six-member Monetary Policy Committee (MPC) chaired by RBI Governor Sanjay Malhotra.
This “jumbo” cut signals the central bank’s intent to stimulate credit growth, ease the debt burden on consumers, and support investment, especially in interest-rate sensitive sectors like real estate, automobiles, and infrastructure.

Rationale Behind the Cut: Inflation Under Control, Growth Stable
The decision to slash rates came amid favourable macroeconomic indicators. Retail inflation, measured by the Consumer Price Index (CPI), eased sharply to 3.16% in April 2025—well below the RBI’s upper tolerance limit of 6% and even lower than its medium-term target of 4%. A strong rabi crop, softening global commodity prices, and falling crude oil costs contributed to the decline in price pressures.
India’s GDP grew by 7.1% in FY25, fueled by a manufacturing resurgence, strong exports, and solid domestic demand. With controlled inflation and a stable growth trajectory, the RBI implemented aggressive monetary easing to boost liquidity and consumption.

What Does This Mean for Borrowers? EMIs to Fall
One of the most direct and positive implications of the rate cut will be for retail loan borrowers. Home loans, car loans, personal loans, and education loans are all expected to become cheaper as banks pass on the rate cut by reducing their lending rates.
For example:
A borrower with a ₹50 lakh home loan at 9% interest for 20 years would pay an EMI of ₹44,986.
Post a 50 bps reduction, if the bank revises the interest rate to 8.5%, the new EMI would be ₹43,391.
This is a monthly saving of ₹1,595 or almost ₹3.83 lakh over the loan tenure.
Banks like HDFC Bank, SBI, and ICICI Bank have already hinted at revising their repo-linked lending rates in the coming days, promising relief to both existing and new borrowers.

What Happens to FD Rates? Investors May Lose Some Shine
While borrowers cheer, conservative investors—especially senior citizens—who rely on fixed deposits (FDs) for regular income may find their returns declining. As banks lower lending rates, deposit rates usually follow.
For instance, the average 1-year FD interest rate that currently hovers around 6.7%–7% could dip by 25–40 bps in the short term. Certain banks, such as Axis Bank and Kotak Mahindra Bank, have indicated that they may lower their fixed deposit rates.
This may push investors to explore alternate avenues like debt mutual funds, RBI floating rate bonds, or senior citizen savings schemes to maintain yield.

Sectoral Impact: Real Estate, Auto and MSMEs to Gain
The real estate sector stands to benefit significantly from the cut. A reduced interest rate on home loans increases housing affordability, particularly in urban and tier-2 cities where demand has been reviving post-pandemic. Developers anticipate higher sales volumes in the upcoming quarters as financing becomes more accessible.
Similarly, the auto sector—especially two-wheelers and entry-level passenger cars—is expected to see improved demand as lower EMIs encourage purchases.
MSMEs, sensitive to interest rates, will benefit from lower working capital costs, improving margins and supporting expansion.

Switch to Neutral Stance: End of the Easing Cycle?
Interestingly, the RBI also changed its policy stance from “accommodative” to “neutral,” signalling that further rate cuts are not guaranteed. Governor Malhotra stated during the post-policy press conference:
“With inflation now in a comfortable band and growth holding up, we see the current rate level as sufficient to support the economy. Future actions will be data-dependent.”
This shift indicates that the RBI might adopt a wait-and-watch approach in upcoming quarters, especially as global monetary tightening continues and crude prices remain volatile.

Real-World Impact: From Mumbai Households to Rural India
For salaried professionals in metro cities like Mumbai and Bengaluru, this move brings much-needed respite. For instance, 35-year-old IT employee Rahul Tiwari, who recently took a ₹70 lakh home loan, says:
“This rate cut is a huge relief. It makes the EMI more manageable. I may consider prepaying a portion of my loan now.”
In rural India, the rate cut could support agriculture and small-scale industries by easing the cost of credit. Cooperative banks and NBFCs catering to rural borrowers are expected to follow suit in lowering interest rates.

Looking Ahead: Balancing Growth with Financial Prudence
The RBI’s bold decision is timely and addresses both cyclical growth concerns and borrower distress. However, the central bank will have to remain vigilant about inflationary risks stemming from external shocks like crude oil price volatility, geopolitical tensions, and global supply chain disruptions.
The financial markets reacted positively to the announcement, with the Nifty 50 gaining 120 points during the day and banking stocks experiencing increases of as much as 2%.

Conclusion: Bold, Balanced and Borrower-Friendly
The RBI’s 50 bps repo rate cut marks a decisive intervention to stimulate credit and demand. With inflation under control and a stable macro backdrop, the central bank has chosen to deliver a strong signal of support to the economy. While borrowers cheer the fall in EMIs, investors may need to re-strategize their portfolios amid falling FD rates. As the RBI moves into a “neutral” phase, upcoming decisions will rely significantly on changing data trends. For now, the move is a welcome relief to millions of Indian households and businesses alike.

 

 

 

 

 

 

 

 

 

 

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RBI’s Repo Rate Cut: Your Wallet’s New Best Friend

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RBI's Revised Co-Lending Norms Set to Transform NBFC Growth
Equities, Markets - January 29, 2025

MPC must maintain stable policy rates in the current scenario

MPC must maintain stable policy rates in the current scenario

Overview
In the month of February, the Reserve Bank of India’s Monetary Policy committee will take a decision on policy rates based on the effectiveness of the current policy rates on the economy. Under the guidance of new RBI governor, Sanjay Malhotra, the committee will take into consideration recent data of growth in GDP and consumer price index-based inflation.

In the third quarter of the financial year 2025, the CPI was around 5.6 percent which was higher than the target set but in order of the projections of RBI. While the expected actual growth in GDP is about 6.4 percent in the financial year 2025 in check with the GDP projection of the RBI which is 6.6 percent. Based on these aligned results, MPC will prepare future projections on inflation risks and growth aspects.

Recent Condition of India
After the MPC meeting in the month of December, there has been an increase in threats about short-terms risk in price stability. In present times, the Indian rupee faced depreciation of about three percent. The reasons for this are rising uncertainty about the USA position on tariffs, increased strength of dollar in the market, high fluctuations in the financial markets have resulted in affecting inflation level and rates.

In the year 2025, the Federal Reserve of USA has decided to maintain a hawkish stance and hints at not many reductions in rates. It led to development of cautious sentiments in the investors.

Baseline Projections of RBI
It states that the overall inflation in India is projected to be more than the target of 4 percent for the upcoming six months. There will be high food inflation but with a gradual decline in it. In contrast to this, core inflation will remain consistent. Both food and core inflation will be in between 4.5 percent to 5 percent in the upcoming 6 months. The depreciation of the rupee acts as an upside risk to these forecasts.
Comparatively inflation in India is high leading to overvaluation of the Indian Rupee and which in turn makes export of the country expensive. To resolve this issue, India needs to lower the value of the rupee in nominal terms. It also has to be cautious about price stability as steps taken for disinflation can lead to a burden on the cost of imported goods.

Projections of GDP
RBI’s projection on GDP is strong growth. According to it, India will speed up its growth in GDP from the second half of the financial year. In the financial year 2024-2025, its expected actual GDP is below the previous financial year’s GDP growth. While the nominal GDP is projected to remain the same for the current financial year as well. It was 9.6 percent in the previous financial year and is expected to be 9.7 percent in the current financial year. The reason lower actual growth is probably due to rising inflation levels. It has adversely affected demand levels in urban areas. It hints at the requirement of vigilant monetary policy steps towards the situation.

The expectation of the IMF is about 6.5 percent growth in the upcoming two years in India. The anticipation seems reasonable in nature. It will be aided by fixed financing by the upcoming budget. The government of India is also focusing on aspects like consistent growth in tax collection and fiscal consolidation.

Factors affecting growth
In the current financial year, lower capital expenditure led to moderate growth in investments which in turn led to cutting of development in nearly half. However, this scenario will possibly change as capex increases. On the other hand, private consumption is going to be supported by continuing return to health in rural demand. The growth in the service sector will help to boost urban demand.

Overall, the growth perspective of the financial year is going back to its potential growth level. It was earlier higher than 7 percent for three years in a row. In this scenario, it is better for India to maintain a cautious approach.

Liquidity issues
RBI must focus on keeping the weighted average call rate in the range of policy rates. From the second half of December, the country is facing an issue of liquidity deficit. The RBI took the decision of reducing CRR to about 50 basis. It also has taken actions such as daily variable rate repo auctions. Even in the condition of prevailing liquidity deficit, it has helped in keeping the call rate in the range of 6.50 percent of repo rate and 6.75 percent of marginal standing facility. Overall, it is able to keep the short-term rates at a secure level. Also, rates of deposits and credits of banks are at steady levels. Despite contraction in loan growth of the bank which was 12.5 percent, it is higher than nominal growth in GDP. The trend of government and corporate bond yields is also stable.

In the month of October, RBI had a liquidity surplus of about Rs. 4.885 trillion. In present times it is contracted to Rs. 64,350 crore. It can lead to higher rates in the economy. Also, policy cuts without sufficient liquidity can lead to weak impact on the economy.

Focus on Price Stability
In case the sale of dollars leads to contraction in liquidity, RBI can do open market buying of government bonds as it has already reduced CRR rates. In the current scenario of the US uncertainty, RBI must concentrate on price stability to maintain stability in the economy.

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India’s export in auto industry reach 19 percent

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Liquidity is a major concern in the Indian Banking Sector
Equities, Markets - January 28, 2025

Liquidity is a major concern in the Indian Banking Sector

Liquidity is a major concern in the Indian Banking Sector

Overview
Following the sharp decline in a crucial liquidity metric, Indian lenders have requested that the central bank inject long-term cash into the banking sector, according to six treasury officials. The liquidity management framework of the RBI has emerged as a major worry for corporates, NBFC executives, and bankers alike. Interest rate negotiations, which have historically dominated conversations between the central bank and the government, have been overshadowed by tight liquidity, a crucial concern. Given the strain on the system, the RBI should review its strategy for managing liquidity to make sure it still reflects the state of the economy and the financial system.

The RBI must provide liquidity support to maintain smooth credit flow in the face of persistent liquidity constraints in the country’s banking system. Although open market operations (OMOs) are a common method of introducing primary liquidity, structural and legal issues limit their usefulness in the present situation.

Liquidity Tightening: A rising concern
A daily liquidity shortage of more than Rs. 1 lakh crore has been present in the interbank market (LAF system) since December 16, surpassing Rs. 2 lakh crore on a regular basis since January 4, and reaching Rs. 3.3 trillion on January 23, 2025—the biggest amount since 2010. Furthermore, by late December 2024, total liquidity—including government cash balances—had drastically decreased from a surplus of Rs. 3- 4 lakh crore during the previous two years to barely Rs. 64,350 crore.

Causes of Liquidity Crunch
The RBI reduced its foreign exchange reserves from over $700 billion in October to $623 billion by mid-January 2025 as a result of selling large amounts of dollar reserves to counteract the rupee’s decline brought on the aggressive inflows of foreign funds. Equivalent rupee liquidity has been removed from the system as a result of these dollar sales. In January alone, foreign portfolio investors sold $8.2 billion worth of Indian stocks and bonds, reversing the $1.8 billion in inflows in December and significantly depleting liquidity.

Additionally, the change in asset allocation patterns is a major element causing liquidity issues. Bank fixed deposits have been replaced by investments in insurance, PFs, and pension products due to tax benefits. These vehicles make significant investments—more than 60–70%—in government securities (G-Secs) and State Development Loans (SDLs), in contrast to banks, which devote about 75% of their resources to the private sector. Due to institutional investments that disproportionately benefit the government or PSU sectors, this change has increased the cost of funding between SMEs and MSMEs. OMOs by themselves are unable to adequately meet systemic liquidity demands when banks’ contribution to government funding declines.

Steps taken by RBI
In order to inject Rs.1.13 trillion into the system, the RBI lowered the Cash Reserve Ratio from 4.5% to 4% on December 8. By January 20, the daily repo will have increased from Rs. 50,000 crore to Rs. 82 lakh crore. FX swaps and longer-term repos have also been used. The total value of the open market operations (OMO) was Rs.10,000 crore. Systemic and structural issues are the reason why the liquidity shortfall continues in spite of these steps.

Structural Challenges to Liquidity Management and Tools

OMO Challenges
The ability of banks to offer excess government securities to the RBI determines how successful OMOs are. However, banks lack the flexibility to effectively participate in OMOs because they are operating near their minimal Liquidity Coverage Ratio (LCR) criteria. OMOs give institutional investors the ability to tender bonds to the RBI in return for cash, such as insurance firms and provident funds (PFs). However, unless bondholders turn their holdings into bank deposits, this liquidity inflow has little direct effect on the banking system. As a result, OMOs frequently cause government bond yields to drop precipitously without giving banks a corresponding increase in liquidity.

Institutional investors may further disintermediate the banking system if they reallocate the funds to corporate bonds. As a result, banks’ deposit growth would be constrained, and credit and deposit expansion would both decline. Businesses that rely on bank loans, such as retail borrowers, MSMEs, and SMEs, are disproportionately affected by this situation, which keeps their cost of financing constant. The gap between high-quality borrowers and the whole economy is widened as AAA-rated corporations and government bonds profit from declining yields.

Rate Cut Issues
The RBI’s rate cuts are unlikely to have the desired effect until structural liquidity concerns are addressed. High deposit costs prevent banks from efficiently passing rate reductions on to customers. Therefore, rate cuts run the danger of being ineffectual in the absence of specific actions to reduce banks liquidity.

Other Crucial Challenges
The transition to a just-in-time payment system for state funding has resulted in idle government cash sitting outside the banking system, which brings us to the issue of unspent government balances and liquidity management. Interest rates are rising as banks like SBI, which formerly depended on government deposits, compete for customer deposits. Additionally, when the bank replaces maturing loans with new deposits, the HDFC-HDFC Bank merger has boosted competition for deposits. The FD to Mutual Fund Shift is another important aspect as bank FD holders progressively switch to mutual funds, the demand for long-term FDs declines. Furthermore, banks are being forced to hold more idle cash as a result of the unexpected needs for liquidity brought on by the quick adoption of UPI, NEFT, and RTGS.

Conclusion
The RBI must investigate fresh and creative instruments to promote banking system liquidity and encourage wider credit expansion. In addition to CRR changes, strategies like buy-sell FX swaps, long-term repo operations (LTROs), or dynamic modifications to LCR rules could guarantee liquidity flows to the most vulnerable industries. In summary, resolving the lack of liquidity in India’s banking sector necessitates a multipronged strategy that takes into account structural changes, regulatory adjustments, and creative liquidity solutions. The RBI can guarantee fair access to credit and promote sustainable economic growth by reorienting its policy instruments to the changing financial environment.

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Budget needs to focus on local infrastructure

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Contraction in Banking Stocks to around 6 percent due to RBI's repo rate cut
Equities, Markets - January 24, 2025

Fed Holds Steady: Rates Unlikely to Drop Amid Policy Uncertainty

Fed Holds Steady: Rates Unlikely to Drop Amid Policy Uncertainty

Overview
The bond manager’s investment chief predicts the US central bank will hold off on making cuts until it has more information about Trump’s policies. According to bond fund behemoth Pimco, the Fed is prepared to leave interest rates steady “for the foreseeable future” and may even raise borrowing costs while central bankers wait for clarification on Donald Trump’s objectives.

Market Commentary on Fed Rate Cuts
According to Ed Yardeni, President of Yardeni Research, this strategy is anticipated to maintain the dollar’s strength due to significant inflows into US capital markets and competitive bond yields. Although market optimism was bolstered by Fed Governor Christopher Waller’s recent remarks regarding inflation approaching the target level, Yardeni rejected the possibility of further rate decreases in the near future.

The chief investment officer of the $2 trillion asset management, Dan Ivascyn, stated that he anticipated the US central bank to maintain stable interest rates until there was more clarity either on the data front or the policy front.

Ivascyn’s comments coincide with a Wall Street discussion concerning the Fed’s rate-cutting cycle’s future due to worries that increased inflation could be exacerbated at a time when the US economy has shown more resilient than anticipated if Donald Trump implements his plans to impose sweeping tariffs. According to Ivascyn, several of the new regulations have the potential to have a very favorable long-term impact on productivity and growth. He also mentioned that there was a conflict between what would make sense in the long run and what might put some strain on things in the short term.

Ivascyn cited a number of recent polls that indicated a rise in consumers’ inflation expectations, which is sometimes a leading indication, to support his claim that rate hikes were undoubtedly feasible but not in his baseline scenario. Pimco has been boosting its exposure to government bonds in order to capitalize on the strong yields available, according to Ivascyn. Further, Ivascyn said that a positive outlook for fixed income is not based on the Fed making further cuts.

Fed unlikely to alter Rate Cuts
In December, Fed chief Jay Powell stated that inflation was trending sideways and labor market concerns had decreased, indicating that the central bank would likely be more cautious about rate reduction this year. Additionally, he pointed out that some officials have started to factor Trump’s proposed policies into their projections.

Fed policymakers are anticipated to hold off on raising rates until at least the summer when they meet for the first time this year on January 28–29. The Federal Open Market Committee is unlikely to lower interest rates on January 29. According to the CME FedWatch Tool, fixed income markets presently forecast a 99.5% chance that interest rates will remain unchanged at their current level of 4.25% to 4.5%. Interest rate cuts in March or May are still feasible, though. At one or both of those meetings, the odds are about equal.

According to the employment data for December, job creation has remained strong. The job market remains strong, according to Federal Reserve Governor Lisa Cook, who stated this on January 6. The unemployment rate is still low, and Americans are generally earning wages that are increasing more quickly than inflation. Although it was made a few days prior to the latest jobs report, this remark largely echoed its analysis.

Perhaps the strength of the labor market reduces the pressure on the FOMC to lower interest rates. However, December’s CPI inflation statistics, which was released in January, revealed that inflation was still lower than some had anticipated. In the end, that might help the FOMC lower rates in 2025 if inflation seems to be on track to reach 2% annually. Numerous measures of inflation are more in line with an annual rate of 3%.

Treasury Yield to increase in future
The 10-year Treasury yield is now trading at 4.5% after falling to about 3.6% in September due to a sell-off in US government bonds fueled by the more hawkish outlook. Ivascyn also cited high equity valuations and cautioned that stocks would be impacted by a further increase in Treasury yields.

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Impact of Trump 2.0 on Indian Equity Market

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Business, Equities, Market News, Markets - January 10, 2025

RBIs financial stability review spots two risk from trump 2.0

RBIs financial stability review spots two risk from trump 2.0

The Reserve Bank of India (RBI) publishes its Financial Stability Review (FSR) semi-annually in a financial year. It generally evaluates the nature and magnitudes of risks affecting the Indian financial sector. It analyzes the strength of financial institutions to mitigate these risks with the help of stress tests. These risks consist of both international and domestic risks, with special focus on domestic risks. In the month of December 2024, the FSR realised signals of two prominent risks coming from the US elected-President Donald Trump’s administration.

The Financial Stability Unit (FSU) of RBI and its FSR publication came into existence to initiate crisis management and also to prevent crises such as the global financial crisis 2008. The FSU came into existence in August 2009 by global financial crisis 2008 and implementation of semi-annual publication of FSR in October 2009. Today, the FSR is released in the months of June and December every year. The FSR focuses on both macroeconomic and market related risks.

Current FSR report
The FSR of the month of December 2024 identifies two distinct risks associated with the upcoming new administration in the USA which will assume office in a fortnight. The first risk is the uncertainty brewing in the economy due to the support given to cryptocurrency by Trump’s regime. While, the second risk is the risk to the global economy from Trump’s proposed economic policies. It could occurring due to increasing geopolitical tensions, uncertainty associated with trade and industrial policies and potential tightening of financial conditions around the world leading to lower global economic output compared to its baseline projects.

The victory of Donald Trump in the US presidential elections gave a liberating path for the people and institutions who support the idea of decentralised finance or DeFi and particularly cryptocurrency. The Trump has a favorable opinion about Bitcoins and preference for crypto friendly regulations. Following the victory of Trump, Bitcoins registered pricing hiting more than $100,000 in the secondary market. This rally was influenced by the expectation of implementation of crypto-friendly policies under his regime.

Three reasons influencing the Bitcoins
There are three reasons which strongly influenced the rally of Bitcoins. Donald Trump in his election has constantly promised that he would make a strategic bitcoin hoard. This hoard would act as a reserve asset, where the US government would accumulate and hold a significant amount of Bitcoin. This reserve asset would be similar to any country’s foreign exchange or gold reserves. The main purpose for creating this reserve asset is to bring stablization in the financial system by mitigating inflation and also to strengthen its position in the global cryptocurrency market. The second reason is Trump and his family are closely connected with the cryptocurrency and DeFi movements via investments. The last reason is Trump nominated Paul Atkins, cryptocurrency supporter for the position to head the Securities and Exchanges Commission. It hints at easing up of earlier regulatory restrictions on crypto products.

Views of RBI
The Reserve Bank of India is worried about the risks associated with crypto products on the overall financial system. Its attempt to ban crypto products in India was rejected by the Supreme Court of India. As the Supreme court said that RBI does not have the right to impose restrictions on cryptocurrency trading. After this judgement, RBI strengthened the regulations and prohibited regulated entities from financing or supporting crypto products.

Many senior officers have given their public opinions on risks associated with cryptocurrency. The Deputy governor of RBI, T. Rabi Sankar stated that cryptocurrencies are created with the specific purpose to avoid a regulated financial system in his public speech in the year 2022. Further he stated that the cryptocurrencies have the potential to destroy the currency system, the monetary system, the banking system and overall government’s capacity to control the economy. The crypto products act as a threat to the financial sovereignty of a nation. There is also a possibility of strategic manipulaton by private firms or the governments who created and control them. These are reasons which led to the formation of the most advisable and possible choice of banning cryptocurrency in India.

During the discussion at Peterson Institute, Washington DC in October 2024, the former governor of RBI, Shaktikanta Das asserted the risk associated with cryptocurrency to the financial and monetary system. He requested coordination between central banks across the world regarding regulation on the crypto products.

Despite all this, the strong position of the Trump administration towards crypto products is increasing anxiety within RBI and its view towards risks associated with it. The current FSR report particularly states that widespread use of crypto-assets and stablecoins will certainly affect macroeconomic and financial stability. It could adversely impact the effectiveness of monetary policy, fical risk and avoid capital flow managment measures. It will also draw away the resources available for the purpose of financing the real economy and in turn threaten global financial stability. Despite the crypto products market being small in size, it keeps on growing. Its association with the traditional financial system is increasing to a potential systemic risk. Stablecoins also pose a potential risk.

The RBI is worried about the linkages between the monetary system and DeFi due to the potential it carries. As instability in DeFi can lead to temporary issues like liquidity problems, maturity mismatches, price volatility in assets and also have a spillover impact on the real economy, while regulators having no control on it.

Trump is promoting tokenisation as well. He and his three sons are providing support to World Liberty Financial, who develops tokens against crypto products. Though the company declines association with Trump’s extended family, there are proofs such as purchases of tokens or play roles of advisory.

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Tata Motors Stock Slump: Analyzing the Decline and Road Ahead

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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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Business, Equities, Market News, Markets - September 2, 2024

The Impact of RBI's Money Policy and Bank Earnings on Loan-to-Deposit Ratios

The Impact of RBI’s Money Policy and Bank Earnings on Loan-to-Deposit Ratios

The loan-to-deposit ratio (LDR), a crucial metric for assessing a bank’s liquidity and lending effectiveness, has significantly decreased in the banking industry in recent years. Economists, politicians, and financial experts have all vigorously debated this tendency. Fundamentally, the Reserve Bank of India’s (RBI) reduced money creation and a notable rise in bank profits are the two key causes of the reduction in LDRs. Comprehending these processes is essential to grasping the wider consequences for the banking industry and the economy.

The lower pace of money creation by the RBI is one of the main causes of the fall in LDRs. A central bank creates money via expanding the monetary base and issuing new currency, both of which increase the amount of liquidity in the banking system. In practice, less new money enters the economy when the RBI scales back its money production efforts.

There are a number of reasons why there could be less money creation, including a purposeful policy change to fight inflation or stabilise the currency. The tightening of monetary policy by the RBI in response to inflationary pressures has had a major role in the recent drop in LDRs. The central bank attempts to control inflation by increasing interest rates and decreasing the money supply, but this ultimately restricts the amount of money that banks may lend. Because of this liquidity constraint, banks are unable to lend as much, which lowers the loan-to-deposit ratio.

Bank profits have increased significantly in tandem with the RBI’s decreased money creation. A decrease in non-performing assets (NPAs), increased interest rates, and cost-cutting initiatives are some of the causes of this profit surge. Banks often take a more conservative approach to lending as they get more successful, emphasising quality over quantity.

Increased earnings frequently result in a bank’s capital base strengthening, increasing its capacity to keep reserves and lowering the need for riskier lending practices. Furthermore, banks are able to depend increasingly on fee-based revenue rather than conventional interest income from loans as a result of their increased profitability. Because they may now earn money from investment banking, wealth management, and transaction fees, banks are under less pressure to maintain high loan-to-deposit ratios.

A further dynamic that further adds to the reduction in loan-to-deposit ratios is created by the interaction between weaker money creation by the RBI and higher bank profits. Because there is a decrease in money creation, banks must exercise greater caution when managing their liquidity and frequently choose to preserve larger reserves over making additional loans. In addition, banks now have a financial buffer thanks to their higher profitability, which lessens their need to make risky loans in order to make money.

The overall economy is significantly impacted by the drop in loan-to-deposit ratios. It may be a sign of a more secure and cautious banking industry, but it might also mean less loan activity, which could have an effect on economic expansion. Reduced loan-to-deposit ratios (LDRs) indicate that banks may not be making the most of their deposit base to sustain credit growth, which might result in a slower rate of economic growth—particularly in industries that largely rely on bank financing.

To sum up Reduced money creation by the RBI and higher bank profitability are two of the many reasons contributing to the complicated issue of declining loan-to-deposit ratios in banks. Banks are becoming more cautious and risk-averse, as seen by this trend, but it also raises concerns about the effects on loan availability and economic development. Policymakers, regulators, and market participants must comprehend these dynamics in order to effectively manage the banking industry’s changing terrain and its effects on the whole economy. It will be vital to keep an eye on how these variables interact and influence banking and economic activity in India as the crisis develops.

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Global Rate Cuts and its Implication’s on Indian Markets

Global Rate Cuts and its Implication’s on Indian Markets

The Indian stock markets are on the brink of significant gains as global central banks are expected to initiate a cycle of rate cuts. This optimistic outlook is driven by a convergence of favorable domestic and international factors, including robust economic growth, a stable political environment, and, most notably, the anticipated easing of monetary policy across major economies. As global financial markets brace for lower interest rates, India’s equity markets are likely to be among the key beneficiaries.

After years of strict monetary policies meant to contain inflation, central banks all over the world are indicating rate decreases, which is a significant change in the global economy. The main causes of this change in attitude among investors are the economy’s slowing growth, ongoing inflationary pressures, and geopolitical unpredictability.

Interest rate cuts are a tool used by central banks to encourage borrowing and investment. By lowering the cost of borrowing, central banks aim to stimulate economic activity, increase consumer spending, and ultimately drive economic growth. The expectation is that lower interest rates will lead to increased investment by businesses, more spending by consumers, and, consequently, higher demand for goods and services.

The transfer of capital across national boundaries is one of the most direct consequences of global rate reduction. Investors frequently look for better returns in developing markets when interest rates in established economies decrease, which increases capital inflows into nations like India. When foreign investors buy Indian bonds and stocks, asset values rise and stock markets benefit.

For emerging markets like India, lower global interest rates are a boon. Rising capital flows into developing countries are usually the consequence of rate reductions in developed economies, as investors seek greater profits.
India, with its strong economic fundamentals and attractive growth prospects, is well-positioned to attract a significant share of these inflows. This influx of foreign capital is expected to provide a substantial boost to Indian equity markets, driving up stock prices and enhancing market liquidity.

Investor sentiment in India has been increasingly bullish, driven by a confluence of factors. The consistent performance of Indian equities, particularly in sectors like technology, pharmaceuticals, and consumer goods, has instilled confidence among both domestic and international investors.
Many Indian companies have reported better-than-expected quarterly results, reflecting robust demand and effective cost management. This trend is expected to continue, especially in sectors that are poised to benefit from global rate cuts, such as real estate, infrastructure, and financial services.

While global rate cuts can provide short-term boosts to the Indian economy through increased capital inflows and stock market rallies, there are long-term implications to consider. For instance, excessive dependence on foreign capital can make the Indian economy vulnerable to external shocks. If global investors suddenly withdraw their investments due to changes in global monetary conditions, it could lead to a sharp correction in Indian markets, potentially destabilizing the economy.

While the outlook for Indian stock markets is largely positive, investors should remain cautious of potential risks and challenges. Global economic conditions, while improving, remain fragile. Any unexpected developments, such as a sudden escalation in geopolitical tensions or a resurgence of inflationary pressures, could disrupt financial markets and dampen investor confidence.
While global rate cuts are expected to benefit Indian markets, they could also lead to increased volatility. Rapid inflows of foreign capital, while beneficial in the short term, could create asset bubbles if not managed carefully.

In conclusion, Rate reductions throughout the world have mixed effects on the Indian economy. They can have short-term advantages like capital inflows, stock market gains, and the possibility of domestic rate reduction, but they can also have drawbacks like instability in the currency, inflationary pressures, and susceptibility to outside shocks. India has to be cautious about the dangers and maintain a balanced approach in order to take advantage of the possibilities presented by the global rate decreases. To guarantee sustained economic growth, India’s authorities must continue to be proactive in regulating these dynamics as the world’s monetary circumstances change.

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India's Inflation Soars in November: A Look at the Drivers and Policy Response

India’s Inflation Soars in November: A Look at the Drivers and Policy Response

Introduction:

In November, India experienced a notable rebound in inflation, primarily attributed to a surge in food prices. The increase, marked by various factors, poses challenges to the ongoing efforts to maintain price stability. This report delves into the key contributors to the inflation rebound, its implications, and potential considerations for policymakers.
➡️India’s retail inflation, measured by the Consumer Price Index (CPI), rose to 5.70% in November 2023, driven by higher food prices.
➡️This marks a rise from 4.87% in October and brings inflation closer to the upper end of the Reserve Bank of India’s (RBI) target range of 2-6%.
➡️The increase in food prices, which account for nearly half of the inflation basket, was led by items like onions, tomatoes, and pulses.
➡️Core inflation, which excludes volatile food and energy prices, remained subdued at 4.3%.

REASONS FOR THE INFLATION REBOUND:

I. Unfavorable weather conditions: Heavy rains and unseasonal hailstorms in key agricultural regions disrupted crop production and led to supply-chain disruptions.
II. Festive season demand: Increased demand for food items during the festive season put a strain on existing supplies, pushing prices higher.
III. Global factors: The ongoing war in Ukraine and other geopolitical uncertainties continue to impact global commodity prices, including food and energy.

IMPLICATIONS:

I. Impact on Consumer Purchasing Power: The rise in inflation, particularly driven by higher food prices, could potentially erode consumer purchasing power. This may have implications for household budgets and discretionary spending, impacting overall economic activities.
II. Policy Challenges: The inflation rebound poses challenges for policymakers tasked with maintaining a delicate balance between price stability and supporting economic growth. Policymakers may need to reassess monetary and fiscal measures to address emerging inflationary pressures.
III. Interest rates: It can lead to higher interest rates, which can make it more expensive for businesses to borrow and invest.

POLICY RESPONSE TO INFLATION:

I. Monetary Measures:
The Reserve Bank of India (RBI) has proactively responded to the inflationary pressures by implementing a series of repo rate hikes. Since May 2023, the central bank has raised the repo rate four times. This monetary tightening is a strategic move aimed at curbing inflation and maintaining price stability.
II. Future Monetary Policy Outlook:
Given the persistent inflation challenges, there is a likelihood that the RBI will continue its monetary policy tightening in the upcoming months. The objective is to bring inflation back within the central bank’s target range, demonstrating a commitment to inflation control.
III. Government Intervention:
Apart from monetary measures, the government is expected to take initiatives to address supply-chain disruptions and enhance agricultural productivity. These interventions are crucial in tackling the root causes of the inflationary pressures, particularly in the context of rising food prices.
IV. Supply-Chain Management:
Government efforts may focus on fortifying supply chains to minimize disruptions and ensure the smooth flow of essential goods. Enhancing the resilience of supply chains is essential for stabilizing prices and mitigating the impact of supply-side shocks.
V. Agricultural Productivity:
To address inflation at its source, the government may implement policies aimed at boosting agricultural productivity. This could involve investments in technology, infrastructure, and agricultural practices to improve output and reduce dependency on imports.

FUTURE OUTLOOK:

I. The future trajectory of inflation will depend on several factors, including global commodity prices, weather conditions, and the success of government policies.
II. Experts predict inflation could stay above 5% in the next few months due to seasonal factors and possible supply-side bottlenecks.
III. The RBI’s policy decisions will be crucial in managing inflation and ensuring economic stability

CONCLUSION:

In conclusion, November’s inflation surge, led by higher food prices, poses a significant challenge to India’s price stability objectives. The RBI’s repo rate hikes signal a proactive approach to control inflation, complemented by expected government interventions targeting supply chains and agricultural productivity. Future inflation trends hinge on global factors and policy effectiveness. With projections indicating inflation above 5%, the RBI’s decisions will be pivotal for sustaining economic stability.

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RBI expects Inflation to cool from October.

RBI expects inflation to cool from October:

Inflation in India is expected to slow down from October. The Central bank will minimize its aggressive action to cut down inflation, as per Governor Das.

As per RBI governor Shaktikanta Das, global factors should have more consideration while assessing inflation targets and current developments in Europe. The governor was focused on the importance of monetary policy. It will help in reducing inflation and inflation targets, despite fears that policy tightening could crease economic growth. He also added, after controlling inflation in the second half, there are chances of recession in India.

The Central bank on Friday eased its monetary policy to increase foreign investment and lift foreign exchange reserves. In India, inflation is above RBI’s target since the start of the year. This affected a hike in interest rates by 90 basis points in the last 2 months. All the central banks have been fighting against inflation driven by surging commodity prices, the Russia-Ukraine war, and supply chain disruptions. In June, RBI said expected inflation was at 6.7% and will cool down from October.

The impact of global factors on the domestic economy has increased over past years due to pandemics and war. So there should be greater recognition of global factors in local inflation and economic growth. This requires more coordination among countries to tackle problems. As per International Monetary Fund’s Latest projections, around 77% of countries have reported an increase in inflation, and this number could reach up to 90% in 2022.

Conclusion:

RBI governor suggested that not all tightening sessions have ended in recession.  He even mentioned that these measures won’t last long. The Central Bank and other major banks have revised GDP projections. It indicates a loss of pace in the growth of the economy rather than loss of a level. RBI governor mentioned many times that RBI plans to bring down inflation to 4% with a sensible slowdown in the economy. Inflation has also raised concerns about whether monetary tightening will end in a global recession or if there can be a soft landing. Global factors have difficult policy alternatives between price stability and economic activity.

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