New Delhi, Feb 4, 2025
SBI economists expect the RBI to announce a 0.25 per cent rate cut in the monetary policy committee meeting on February 7. As the fiscal stimulus of Budget 2025-26 plays out, the RBI at least in the short run has room for rate cuts, according to an SBI Research report released on Tuesday.
The report also states that going ahead a cumulative rate cut over the cycle could be at least 0.75 per cent, with two successive rate cuts over February and April 2025.
With an intervening gap in June 2025, the second round of rate cuts could start from October 2025, it added.
The current pause by the US Federal Reserve gives some time for RBI to ascertain inflationary expectations have been fully anchored, the report said.
The report highlighted that monetary and fiscal coordination will require a delicate hand-holding as the Government navigates on the Fiscal Responsibility and Budget Management (FRBM) path.
According to the report the RBI Liquidity Framework needs to be revisited as a tight liquidity situation can adversely impact the flow of credit in the economy. The average liquidity deficit from December 16, 2024, stands at Rs 1.96 lakh crore as of Jan 31, 2025, while the average Government of India cash balance of the same period came at Rs 2.1 lakh crore,
“Based on the RBIs recent liquidity injections, we are estimating the durable liquidity at the end of the financial year may come around Rs 0.6 lakh crore and system liquidity may be around Rs 1 lakh crore surplus,” the report said.
It also highlighted that the global economy continues to exhibit resilience and is expected to grow 3.2-3.3 per cent by 2025. The global inflation has continued to soften and is expected to approach inflation targets for most of the central banks albeit with different speeds across geographies
The impact of trade wars on global growth, and in turn, on inflation remains uncertain at this stage. While the new US administration’s tariff decision, so far, is confined to North America and to some extent China, the impression of full-scale tariff across all countries has not materialized as yet, the report said.
The general impression is that a fresh round of trade wars will cost 30-50 bps for global GDP growth with differing regional impacts. The regional impact will be more nuanced and conditional on regional economic structure and the stage of the business cycle, according to the SBI report.
The Indian economy against this global backdrop is entering the fourth quarter in the shadow of the Union Budget 2025-26. With fiscal stimulus to support consumption, and an overall fiscal consolidation, the net market borrowings of the Centre is estimated at Rs 11.5 lakh crore for FY26.
“We therefore feel that overall financing of the fiscal deficit will remain comfortable. We believe that 75 per cent of the total financing may be completed through long-term instruments. The current OMO purchase of RBI to the tune of Rs 60,000 crore is 3.8 per cent of available AFS securities as of Sep 2024,” the report added.
With credit growth showing a moderate trend despite the sequential slowdown, the durable liquidity position in the banking system at the end of FY25 may come around Rs 0.6 lakh crore and system liquidity may be around Rs 1 lakh crore surplus, the report added.(Agency)
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