Key Points
- The Reserve Bank of India held its key repo rate unchanged, but cut the Cash Reserve Ratio (CRR) rate by 50bps bringing it to 4.00% from 4.50%. The MPC voted 4-2 to keep the repo rate unchanged, with an additional external member dissenting for a rate cut (Professor Ram Singh and Dr Nagesh Kumar).
- All these developments were in line with our expectations for today’s RBI policy meeting as highlighted in our latest report (see IndiaPulse – Gradual rise in USD/INR to 86 with softer growth, 75bps RBI rate cuts).
- What’s also interesting were announcements by the RBI to shore up capital inflows in the near-term through raising interest rate ceilings on FCNR(B) deposits, perhaps indicating the central bank’s concern on INR weakness.
- Our initial assessment is that the incremental capital inflows into India from these FCNR measures may help INR at the margin temporarily, but should not be substantial enough to change the overall trajectory for USD/INR to head higher.
- We are forecasting USD/INR to grind higher to 85.20 by 1Q2025 and 86.00 by 4Q2025 (calendar year).
- Today’s RBI’s decision makes clear that inflation is still too high for comfort, even as it gave much more of a nod to growth this time around. RBI has now lowered its FY2024/25 GDP growth forecast to 6.6% from 7.2%, while also raising its CPI inflation forecasts to 4.8% from 4.5% previously.
- RBI’s macro forecasts build in an expectation for food inflation to come down over time with inflation expected to reach 4%yoy by the July-Sep quarter in 2025, and also growth to rebound with improvements in high frequency indicators together with support from the rural economy and private investment.
- Ultimately, the path forward for RBI’s repo rate will be determined by the macro outcomes and in particular the growth inflation mix.
- On that front, while we agree with RBI that the recent weak GDP print has likely marked the trough in economic activity, we disagree with the degree of rebound that the RBI is forecasting. Several factors will continue to weigh on growth, including delayed inflation moderation, slower RBI rate cuts, RBI’s moves to tighten macroprudential measures including on unsecured credit, coupled with the government’s continued fiscal consolidation path.
- This is even as we highlight positive factors such as good Kharif and Rabi harvests, strong government spending on social support schemes, and still strong corporate sentiment.
- We are forecasting India’s growth at 6% in FY2024/25 and 6.3% in FY2025/26, slower than the RBI’s forecast of 6.6% for this fiscal year (see IndiaPulse – Gradual rise in USD/INR to 86 with softer growth, 75bps RBI rate cuts).
- On monetary policy, one key question to concern the RBI is also whether Governor Das’ term will be extended by the Government after it is up on 10 December. Governor Das did not provide any answer on that during the post-policy press conference. Meanwhile, with RBI Deputy Governor Michael Patra retiring in Jan 2025, coupled with three reasonably new members of the MPC appointed recently, the composition of the MPC may tilt more dovish in 2025.
- In addition, in order to attract more capital inflows, the RBI raised the interest rate ceilings by 150bps on Foreign Currency Non-Resident (FCNR(B)) deposits till March 2025. Banks are now permitted to raise FCNR(B) deposits of 1-3 years at the overnight Alternative Reference Rate plus 400bps compared with 250bps currently. Meanwhile, for FCNR of 3 to 5 years, this ceiling has been increased to +500bps from 350bps.
- While this move may help attract some additional dollar inflows from NRIs at the margin, we do not think it will be substantial enough to change our forecast for USD/INR to head higher over time.
- The most effective measure on FCNR was in 2013, when RBI significantly subsidised exchange rate risks for banks by providing a swap facility at 3.5% in order to hedge INR FX risks under former RBI Governor Raghuram Rajan. Back then, the facility attracted more than US$30bn of inflows.
