The Reserve Bank of India (RBI) is expected to begin its rate easing cycle with a 25-basis point cut in interest rates at the Monetary Policy Committee (MPC) meeting scheduled for February 7, Morgan Stanley said on Tuesday, adding that the central bank is likely to maintain its neutral stance.
“We expect the RBI to inject durable liquidity and closely monitor the currency to curb excessive volatility,” the report said.
Headline Consumer Price Index (CPI) softened to 5.2 percent Year on Year (YoY) in December 2024, led by slowing food prices and core CPI inching down.
“We expect disinflation in food prices to gather further pace and thereby support the disinflationary momentum in headline CPI as it averages 4.5 percent YoY in QE March 2025 (in line with the RBI’s estimates of 4.5 per cent),” the report said.
In order to ensure orderly liquidity management, the RBI has taken measures such as Voluntary Retention Routes (VRRs) of higher quantum, daily VRR since January 16, buyback of government securities (Rs 750 billion in January) and purchase of government securities in the secondary market (Rs 102 billion in January).
Furthermore, the RBI has also announced additional measures such as Open Market Operation (OMO) purchases worth Rs. 600 billion, 56-day VRR of Rs. 500 billion, and buy/sell swaps of Rs. 5 billion.
The global investment bank said in its report that it expects the RBI to embark on a shallow rate easing cycle.
“The confluence of domestic growth-inflation dynamics – weaker-than-anticipated growth and a moderating inflation trajectory – warrant rate easing to support growth, in our view,” said the report.
However, this is juxtaposed against an adverse external environment, as demonstrated by dollar strength, higher for longer stance of the Fed, and volatility in global capital flows leading to weakness in the currency.
“Therefore, in our base case, we continue to expect a shallow rate easing cycle of a cumulative 50 bps, starting from February. In addition, we expect the RBI to continue to undertake liquidity management, in an attempt to mitigate outflows resulting from FX intervention and ensure that domestic financial conditions do not tighten significantly,” the brokerage noted.
(With inputs from IANS)
