Note on RBI Policy by Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund
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Below the Note on RBI Policy by Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund
PGIM India MF View: Rate cuts in next MPC policy with focus on liquidity management
We think today’s policy was an acknowledgment of the ongoing slowdown in growth and rather than taking action on one data point, RBI wants more evidence for confirming this trend as highlighted by the RBI governor in the post policy press conference. Thus, we believe that the next MPC policy in February 2025 may announce a repo rate cut of 25bps. RBI has been adopting a calibrated approach so far but as the slowdown in growth becomes more apparent, RBI will need to provide monetary support as mentioned in the RBI Governors statement today. We also believe that RBI will need to do more to manage banking system liquidity, beyond the CRR cut announced today. Liquidity will be tight going ahead as a result of the heavy RBI intervention in the FX markets earlier and seasonal currency outflows going ahead.
MPC Policy on expected lines
After the release of the Q2FY25 GDP release last week, the bond market had started to factor in some sort of monetary easing in today’s policy and the consensus had built towards a reduction in the CRR given the expected tightness in banking system liquidity after the heavy intervention in FX market by RBI over the last couple of months coupled with the expected outflows in the form of an increase in currency in circulation, advance tax and GST outflows. The MPC decision to hold policy rates was taken with a 4-2 majority with Dr. Nagesh Kumar and Professor Ram Singh voting for a 25bps cut in the policy repo rate. The monetary policy stance of “Neutral” was retained unanimously.
The MPC revised both its Inflation and Growth forecast for FY25, pegging down the GDP forecast at 6.60% from 7.20% earlier and increasing the Inflation forecast to 4.80% for FY25 from 4.50% earlier. RBI remains optimistic on GDP growth in H2FY25 after the negative surprise of Q2. RBI expects the H2 growth to average 7% up from 6% in H1. Volatility in food prices has led to an upward revision in its Inflation forecast. The tone of the policy was balanced with an emphasis on durable price stability. The MPC statement mentioned that “strong foundations for high growth can be secured only with durable price stability. The MPC remains committed to restoring the balance between inflation and growth in the overall interest of the economy”. The RBI governor, in his statement, stated, “ On the other hand, a growth slowdown – if it lingers beyond a point – may need policy support."
Market Reaction
Bond yields sold off post policy on lack of any explicit future guidance on rate cuts amidst heavy position build up in anticipation of a monetary action after the Q2 GDP release last week. Though going into the policy, consensus was for a CRR cut and RBI delivered as expected, heavy positioning going into the policy and Deputy Governor’s Patra comment in the post policy press conference that the “ underlying slowdown in growth is coming from inflation” was read as being hawkish by a segment of the market which led to bond yields rising by 5-7 bps across the curve.
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