Advertisement
X

RBI MPC: D-Street Pins Hope on Rate Cut, Will it Steer India's Growth Back on Track?

RBI MPC Meet: All eyes are now on the new RBI governor Sanjay Malhotra, as D-street analysts believe that the key to India Inc.'s revival lies in the hands of the central bank

RBI MPC

RBI Monetary Policy Meet: In the list of bringing economic growth back on a fast track, the budget has already ticked the box of pushing demand by changing the income tax slab, hoping for an increase in consumption levels as disposable income rises. Now, it's RBI's turn.

D-street analysts are pinning their hope on a 25 bps (basis point) rate cut after subdued quarterly performance weighed heavily on investor sentiment. The pressure of reviving the business cycle now largely lies in the hands of the central bank, and the timing seems just right. India's retail inflation dropped to a 4-month low of 5.22% in December month, thanks to easing food inflation which stood at 8.39%. Core inflation, on the other hand, stood at a mere 3.6%.

Advertisement

Expectations remain high for a further decline in food inflation in Q4FY25 as per the Economic Survey, but not without risks.

This does give the MPC (monetary policy committee), headed by new RBI governor Sanjay Malhotra, enough breathing space to start the rate cut cycle. However, there are factors that are complicating the interest rate game for RBI.

It's complicated! Thanks to Fed

The Federal Reserve's recent decision on the interest rate pause coupled with the depreciating value of Rupee against the Dollar is making things difficult for RBI. The domestic currency has already surpassed the record-low value of 87 against the greenback. This might eventually trigger more capital outflows from India.

Although, there is a silver lining to the complicated picture. While everyone has already agreed that Rupee's further decline is inevitable, it might help export levels. A 'gradual' depreciation will also prevent sudden shocks and allow businesses time to adjust.

Advertisement

"Surely, the Fed is still reluctant to cut further and the dollar has been on the rise, which complicates the RBI’s decision, but we think a gradual depreciation of the INR in the face of USD strength is an appropriate strategy," Nuvama stated in its preview report.

What is also worth noting is that RBI has already started injecting liquidity into the system at a time when trade wars seem imminent owing to Trump and his tariff calls. Just last month, RBI announced plans to inject Rs 1.5 trillion into the economy via various instruments.

"In FY26E, we expect the RBI to keep a tilt toward growth as most high frequency indicators show that the economy’s growth momentum is moderating, reflected in the weakening credit impulse," analysts at Elara Capital pointed out. Most brokerage houses are expecting a rate cut of atleast 25bps. However, growing trade war concerns and Powell's recent statement that the Fed isn’t rushing to cut rates have led some to take a more pessimistic stance on the RBI holding off on rate cuts.

Advertisement

D-street Divided Over Rate Cut

Amar Ambani, Executive Director at Yes Securities is not anticipating any rate cuts in the upcoming policy meeting. "While inflation is showing signs of easing and domestic growth requires support, global conditions remain unfavourable for a rate cut at this stage. With China imposing retaliatory tariffs on the US, the RBI is likely to adopt a wait-and-watch approach regarding further developments in the trade war," he said.

At the same time, some analysts believe that, as growth takes centre-stage, a prospective cut would accelerate the much-needed revival.

As per Anand Rathi brokerage firm, the lower inflation trajectory, better core sector growth and resilient domestic investment flows continue to underpin market optimism. "The RBI’s whopping liquidity infusion and a likely start to the rate-cut cycle in Feb’25, with an expected cut of 25 bps, would give a further fillip to a growth rebound," the brokerage firm added.

Advertisement

While the D-street remains divided, the consensus remains clear over infusing liquidity—if not through rate cuts, then by additional measures.

"We expect the RBI to continue addressing the liquidity deficit through additional measures. We see a possibility of a shift in policy stance from the current ‘neutral’ position to ‘accommodative’. This will offer enough reason for the Indian stock market to rejoice," Ambani said.

Show comments