What to expect from February 2025 RBI Monetary Policy

5 Feb 2025 , 01:03 PM

WILL THE NEW RBI GOVERNOR BEGIN HIS TERM WITH A BANG?

The monetary policy statement to be presented on February 07, 2025 will be the first monetary policy presented by the new RBI governor, Sanjay Malhotra. He had taken charge on December 11, 2024; just a few days after the December policy was presented. Having had enough time to familiarize himself with the ground situation and considering the macros, it is very likely that the RBI governor may go for 25 bps rate cut in the February monetary policy. There are several reasons. For this view.

Firstly, the GDP growth has faltered in the first two quarters of FY25. In December 2024, the RBI had cut its GDP forecast by 60 bps for FY25 from 7.4% to 6.8%. The low growth demands a booster in the form of lower rates in the economy. Secondly, hight inflation was a key reason why RBI had abstained from cutting rates in the past. While inflation is still above the 4% RBI target, there are signs of inflation topping out. Both food prices and global inflation have been gradually tapering and the risk is not all that high. Thirdly, a rate cut should get FPI flows back and act as a booster for the rupee value.

KEY ANNOUNCEMENTS IN THE LAST FEW MONETARY POLICIES

If you add up the monetary policy statements of October and December 2024, there have been several key announcement made. Here is a quick dekko.

• In the October policy statement, the RBI had maintained status quo on rates, but had shifted the stance of the policy from “sustained accommodation” to “neutral.”
• In the December 2024 policy statement, the RBI did not tinker with the stance or the repo rates, but cut the CRR by 50 bps to 4.0%, to boost liquidity in the system.
• For FY25, the inflation forecast was raised by 30 bps from 4.5% to 4.8% to better reflect the higher food inflation and the potential risk of oil and weak dollar.
• At the same time the RBI, in its December 2024 policy, also cut the GDP growth estimate for FY25 by 60 bps from 7.2% to 6.6%.

In short, between October and December 2024, the RBI has changed most of the key macros and now the only thing remaining to be changed is the repo rate. It is in this background that the February 2025 monetary policy will be presented.

AN UPDATE ON DATA POINTS AHEAD OF FEBRUARY POLICY?

Between the December policy announcement and the February policy statement, there have been several interesting data points. Firstly, the US has cut rates by 100 basis points between September 2024 Fed policy and the December 2024 Fed policy. This is likely to put some pressure on the RBI to match up. Secondly, India inflation is above 5%, but food prices have shown signs of tapering. That may be good news. Thirdly, the growth in core sector and the IIP growth have been steady in the last few months, and do not pose any short-term risks. Finally, the end of December also saw the current account deficit for Q2 being announced at 1.2% of GDP. However, Q3 and Q4 are likely see more pressure on the CAD.

• WILL THE RBI MPC CUT REPO RATES IN FEBRUARY 2025?

It is very likely that the RBI may choose to offer some relief to the markets by cutting the rates by 25 bps. Even as the US Fed has cut rates by 100 bps since September 2024, Indian rates have not moved. So, there is already leeway to cut rates by 50 bps to 75 bps in India. However, the RBI is unlikely to cut more than 25 bps in February. Future rate cuts, if any, would depend on the outcome of the trade wards, the USDINR trend and the other macro parameters like consumer inflation, spending, IIP, GDP growth, CAD etc. The Union Budget has offered relief of about ₹1 Trillion by way of tax breaks to the salaried. The rate cut can complement the impact of tax cuts on consumer spending. A 25 bps rate cut seems to be on the cards in February 2025.

• WILL THE RBI CUT CRR FURTHER IN FEBRUARY 2025

While the RBI has cut CRR by 50 bps in December 2024, another cut in CRR cannot be ruled out. In December, the CRR cut had infused liquidity to the tune of ₹1.20 Trillion into money markets. As of end of January 2025, the liquidity shortfall in the system stands at around ₹1.96 Trillion. Another CRR cut of 50 bps would release additional ₹1.20 Trillion and bring the financial market liquidity into better balance. The tax sops on TDS and lower personal taxes will also improve liquidity by around ₹45,000 crore in the financial markets. The CRR cut of 50 bps in February would be the perfect recipe to boost liquidity.

• WHAT ABOUT INFLATION AND GDP GROWTH ESTIMATES FOR FY25?

In December 2024 Monetary Policy Statement, the GDP growth for FY25 was cut by 60 bps from 7.2% to 6.6%, while the inflation estimate was increased from 4.5% to 4.8% for FY25. With a bumper Kharif and a robust Rabi expected, no further upticks on inflation are expected. Also, the growth estimates appear to be in line with most global estimates. The RBI would be wary of the impact of the trade wars on inflation, trade, and GDP growth. But, such adjustments may come in April or June policy statements, once the impact is clearer.

Among the RBI members in the MPC, Michael Patra has completed his term and Rajeshwar Rao replaces him. It remains to be seen how the RBI view crystallizes with two key changes in the central bank representation.