Analysts cut FY25 growth estimates; expect RBI rate reduction only in Feb review

Mumbai: The Reserve Bank should avoid a "knee jerk" response to the tepid Q2FY25 GDP growth data, and is most likely to cut rates only in February, analysts said on Monday.

While the central bank is likely to opt for a status quo in the repo rate for the 11th consecutive time on Friday, at least two watchers said it may cut the cash reserve ratio (CRR) or tweak the proportion of deposits parked with the central bank for helping with the liquidity situation.

Reserve Bank governor-headed six-member Monetary Policy Committee (MPC) is scheduled to meet on December 4 to 6, 2024. The decision of the rate-setting panel will be announced on December 6 by Governor Shaktikanta Das.

Almost all of the analysts have revised down their FY25 GDP growth estimates, with some expecting it to touch as low as 6.3 per cent, as against the central bank's forecast of 7.2 per cent.

"It is better that the Q2 growth numbers do not prompt a knee jerk reaction in terms of monetary impulse like rate cut as headline inflation continues to trade at uncomfortable levels, though it is supposed to moderate from November," economists at the country's largest lender SBI said.

They, however, said that the RBI needs to recalibrate its liquidity strategy, but added that it will resist the CRR option. Instead, it may look at tweaking CRR at a micro basis on specific liabilities, and make the tool counter cyclical for future.

Economists at German brokerage Deutsche Bank joined peers in expecting a rate cut in February, but added that it "makes sense" to cut the CRR at the upcoming bi-monthly policy review on Friday.

They expect the FY25 to be at 6.5 per cent as against the earlier expectation of 6.9 per cent, and added that the FY25 number will likely be maintained in FY26. However, they made it clear that a 6.5 per cent growth number is far below the potential growth rate of India.

HSBC's economists, however, said that its estimate of the country's growth rate potential is at 6.5 per cent and added that the heady 7 per cent plus clips observed in the recent past was never sustainable as it was led by a weak base of the Covid period.

The HSBC economists said there will be rate cuts of 0.25 per cent each in the February and April meetings of the monetary policy committee, and the rate setting panel is likely to opt for a status quo in rates on Friday.

American brokerage Bofa Global Research also said that RBI will stay on hold on Friday citing the headline inflation being over the 6 per cent target.

"The guidance will be more balanced, and more votes for rate cuts cannot be ruled out, along with steps to augment liquidity," it added.