SBI Report: According to the report, while the Indian economy faces incremental slowing of growth and geopolitical risks, a knee-jerk reaction such as an immediate rate cut might not be prudent.
The report highlighted that headline inflation continues to remain at uncomfortable levels, making an immediate rate cut unlikely. It suggested that the RBI’s monetary stance should remain neutral, prioritizing growth without drastically altering its policy approach.”We believe the stance should continue to be neutral, supporting growth (withdrawal of accommodation removed in last policy),” it said.
The removal of the “withdrawal of accommodation” stance in the last policy meeting has already provided a foundation for growth support. The report also predicts the first rate cut may happen in February 2025, aligning with its earlier projections outlined in its October pre-policy paper.
According to the report, while the Indian economy faces incremental slowing of growth and geopolitical risks, a knee-jerk reaction such as an immediate rate cut might not be prudent. Despite expectations of moderating inflation from November onwards, headline inflation levels are still considered high enough to warrant cautious policymaking.
“The Q2 growth numbers shouldn’t prompt a kneejerk reaction in terms of monetary impulse like a rate cut as headline inflation continues to trade at uncomfortable levels, though it is supposed to moderate from November,” the report said. The report also emphasized the need to recalibrate liquidity management strategies.
It pointed out that while reducing the Cash Reserve Ratio (CRR) could be a potential option, the RBI has previously expressed reservations about using CRR as a broad liquidity management tool.
Instead, the report proposed a more nuanced approach, suggesting that the RBI could consider tweaking CRR requirements on specific liabilities on a micro basis and making the tool countercyclical.
This approach could offer a more balanced strategy for managing liquidity while addressing inflation and growth concerns. ” While a cut in CRR would be a de facto option, the central bank in the past has expressed in no unambiguous terms that the use of headline CRR as a liquidity management tool may not be the ideal path,” the report said. The upcoming MPC meeting will be closely watched for the RBI’s stance and measures as it navigates the complex dynamics of inflation control and economic growth.
