Synopsis
A report indicates that while a 25bps rate cut by the RBI is anticipated, the market's attention will focus on subsequent actions, especially regarding unconventional policy measures to address liquidity and banking stress.Key Takeaways
- Focus on actions beyond rate cuts
- Liquidity easing measures expected
- Potential CRR adjustments
- Food inflation pressures subsiding
- Long-term inflation trends forecasted to drop
New Delhi, Feb 6 (NationPress) While a 25bps rate cut in the forthcoming RBI MPC policy is not a major subject of market contention, the focus will be on actions regarding what comes after a cut, according to a report released on Thursday.
Easing through unconventional policy tools such as liquidity and regulatory measures is expected to persist.
The RBI may also seek to alleviate the stress present in the non-sovereign money market, as noted by Emkay Global Financial Services.
“We anticipate another round of Rs 300 billion Open Market Operations (OMOs), leading to a cumulative Rs 900 billion+ in FY25E. A CRR reduction is a close decision, but a temporary cut may not resolve the fundamental banking stress,” the report stated.
Adjustments in the upcoming stricter Liquidity Coverage Ratio (LCR) norms (effective April 2025) and lending standards could be favored policy measures. Additionally, we will be monitoring potential capital account easing actions via the FCNR route.
The report indicates that “noisy food inflation” significantly contributed to the overall inflation in FY25, while demand weakness has kept core inflation low.
Nonetheless, immediate food pressures seem to be lessening, with broad-based decreases across food categories, and January inflation is projected to remain below 4.5 percent (compared to December's 5.2 percent).
“Q4FY25E headline inflation is expected to drop to 4.4 percent versus 5.6 percent in Q3FY25, bolstered by strong Kharif production,” the report noted.
For FY26 as well, the average inflation is anticipated to ease to 4.5 percent compared to 4.8 percent-4.9 percent in FY25.
Recent RBI actions since December mark the initiation of easing through stealth, and “we believe this trend will persist in the future.”
Normalizing the CRR to 4.0 percent (injecting over Rs 1 trillion liquidity) in December was the first step in this liquidity infusion process, followed by a series of actions on January 25 (adding Rs 1.5 trillion liquidity).
