On Friday, June 7th, the governor of “The Reserve Bank of India (RBI),” Shaktikanta Das, declared the 2024-25 financial year’s initial monetary policy. The “Monetary Policy Committee (MPC)” of RBI’s two-day review meeting and the rate-setting panel started on April 3rd and ended on April 5th. For the seventh consecutive time, the RBI decided to put unchanged the “key policy repo ratio” of 6.5%.
The RBI policy’s key highlights
Shaktikanta Das, the governor of the RBI, declared FY25’s initial monetary policy. There are some criteria of policy measures, such as a 6.5% unchanged repo rate, maintenance of withdrawal accommodation’s policy change, the forecast of GDP growth by 7%, and the CPI inflation of 4.5% for FY25.
There are some non-policy measures also, such as the announcement of the sovereign green bonds’ trading scheme at IFSC, a mobile app introduction to access the participation’s retail direct scheme of RBI in the G-Sec market for each small finance bank dealing in the derivative products of rupee interest rate. Except these, there are some more non-policy measurements, like for cash deposing facility the UPI enablement, “Prepaid Payment Instruments (PPI)” UPI access via the third-party applications, and CBDC’s distribution via the payment system operators of non-bank.
On RBI policy, George Muthoot
In times of inflation, when the RBI remains cautious, there is a belief in moderating inflationary pressures, which coupled with the normal monsoon’s realization that may open up the rate cuts’ possibility by the RBI in the fiscal year 2024-25’s first half. The global economy’s resilience, continuation of the momentum of economic growth in India, and the coupling with the stability of the relative rupee. It is necessary to pick up steadily in the rural demand condition board’s strengthening and investment activity well for the economy, which fuels the optimism towards the steady demand for the home loans, vehicle loans, and gold loans that Muthoot Finance’s MD George Muthoot said this year.
The expected cut rate in the Q3FY25
In the FY25’s third quarter, after the US FOMC probably begins the cycle of rate cuts. There is an expectation that RBI will put the liquidity neutral so that the high rates’ further transformation can continue and would benefit the nation at a large extend. The LCR framework’s modification is possible going forward and may augur well in the case of bonds, which are the Union Mutual Fund’s fixed income.
On inflation, the comments of the RBI governor give the dovish tilt.
Though food inflation and elevated crude prices are there, different comments on inflation, like “Elephant has gone to the forest” and “Goal in sight,” give the dovish tilt. The fundamental factors stayed healthy at a 7% rate in FY25, which recorded high forex reserve and managed CAD. Overall, in 2HCY2024, there are no disruptions in the rate cut expectations, which is in line with the cycle of worldwide rate cuts. The focus of the market will be back to the dynamics of fiscal demand-supply that looks favorable, especially with the rapid budgetary consolidation over the upcoming two years in 1HFY25.
An expectation of 75-100 bps shallow rate-cut cycle
In FY25, maintenance of the view of 75-100 bps shallow rate-cut cycle is being done. Consequently, the growth of private consumption has slowed, and also, in the series-low core CPI, the weakness is reflected. Hence, there could be a consideration of becoming neutral on the policy stance in the meeting in June or August. However, RBI will continue to be cautious about the rate cuts, which has given rise to uncertainty along with food inflation. Much depends on the technique of planning out of the monsoon season.
