RBI May Ease Monetary Conditions Amid Economic Slowdown

By Swati Bhat
MUMBAI (Reuters) – The Reserve Bank of India (NS:BOI) may ease monetary conditions on Friday by reducing banks' cash reserve ratios after economic growth slowed to a seven-quarter low. However, inflationary pressures may make it reluctant to cut interest rates just yet, analysts said.

The six-member monetary policy committee (MPC) is expected to hold the key policy rate steady at 6.5% for the eleventh straight meeting, though some economists have forecast a 25 basis points (bps) cut following recent growth numbers.

GDP expanded by 5.4% in the September quarter, the slowest pace in seven quarters and sharply below the polled estimate of 6.5%.

Economists at Nomura mentioned, "We maintain our out-of-consensus call for a 25 bps repo rate cut to 6.25%, due to weaker growth and a benign one-year forward inflation outlook." They added, "We do not see any policy tradeoffs from lowering rates at this juncture. We continue to expect 100 bps of cumulative cuts by mid-2025 to a terminal rate of 5.50%."

If the central bank does cut rates, it would be the first time since May 2020.

India's benchmark 10-year bond yield has dropped by 12 bps to 6.68% since the GDP data release last week. Overnight indexed swap rates, which gauge future interest rates, have also declined by 20 bps, suggesting markets are anticipating some policy easing.

However, cutting rates to stimulate growth may not be straightforward, as annual retail inflation surged to 6.21% in October, breaching the central bank's tolerance band for the first time in over a year.

The RBI might infuse liquidity through a possible 50 bps cash reserve ratio (CRR) cut on Dec. 6 and may consider other instruments over the next few months, according to HSBC economists. "It's time to act, strategically," they stated.

CRR is the proportion of deposits that banks must set aside as cash. A reduction of 50 basis points would free up 1.1 trillion rupees ($12.98 billion) for new bank lending and potentially lower market interest rates.

A CRR cut, currently at 4.5%, would be the first since March 2020.

Vikas Goel, managing director at PNB Gilts, warned, "If there is no action on rates or liquidity, we could see an immediate sell-off in bonds, with the benchmark bond yield rising to 6.75% levels and consolidating around that."

($1 = 84.7240 Indian rupees)