RBI May Use Liquidity Tools Over Rate Cuts Amid Growth Concerns

By A Staff Reporter

The Reserve Bank of India (RBI) is likely to keep the current policy rate unchanged during the ongoing Monetary Policy Committee (MPC) meeting, according to a report from Union Bank of India. Amid slowing economic growth and persistent inflationary pressures, the central bank may turn to alternative liquidity management tools rather than rate cuts.

The RBI is not expected to announce a cash reserve ratio (CRR) cut, as such a move would signal that inflation is firmly under control and economic growth concerns are critical. Instead, the report predicts the first rate cut of 25 basis points (bps) in February 2025, followed by another reduction in April 2025.

To address liquidity concerns, the central bank may deploy measures such as open market operations (OMOs) and foreign exchange (FX) swaps. These tools are seen as less aggressive yet effective in maintaining liquidity while balancing inflation and growth. However, the timeline for rate cuts could shift depending on global market volatility, particularly after Donald Trump assumes office as US President in January 2025.

The MPC is under pressure as recent GDP data for Q2 FY25 revealed a sharp slowdown in economic growth, significantly below the projected 7%. Simultaneously, inflation remains above the upper bound of the RBI’s target range of 4% (+/-2%) as of October 2024.

Adding to the challenge are sharp foreign exchange losses, with outflows exceeding $25 billion in the past two months. Core liquidity is expected to remain in deficit in Q4 FY25 unless these outflows reverse.

Despite a potential recovery in the latter half of FY25, the RBI must navigate weak growth, high inflation, external volatility, and liquidity management to stabilize the economy.