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A notable miss in 2QFY25 (3Q) real GDP growth last week has put the central bank’s full year forecast of 7.2% yoy at risk. Even as this GDP print likely marked the bottom of the cycle, and we look for a modest recovery in the second half, FY25 growth is on course to settle in a lower 6.2-6.4% range compared to the previous 6.7-7.0% (read the review here). On the other hand, inflation has been at the upper end of the target range in the past two months, with October’s 6.2% marking the fastest pace of rise in over a year and a half (read details here). Bulk of the increase was on account of higher food prices, which triggered a debate on whether policymakers should consider headline CPI excluding-food to get a handle on the underlying price momentum. Despite an anticipated moderation in November’s inflation, 3QFY (4Q24) average will be at least 60-70bp above the RBI’s 4.8% projection for the quarter. This growth-inflation divergence will put the RBI monetary policy committee (MPC) in a bind ahead of Friday’s policy meeting.
We expect the official growth projection at 7.2% to be lowered by 30-40bp and inflation to be raised by 10-20bp from the current 4.5%. Ahead of the growth undershoot, the MPC had maintained a cautious posture, highlighting limited room to cut rates in the face of above-target inflation. With inflation running above target but expected to moderate going forward, we expect a dovish hold from the MPC, with more members voting for a cut compared to 5:1 ratio at the last review. A rate cut is more likely at the February 2025 meeting. Still there is a small probability that the recent GDP miss might have convinced the MPC to shift to a growth supportive stance and bring forward the rate cut to December.
Liquidity and rupee are the two other areas of focus. From a surplus balance in the past two months, liquidity conditions had tightened due to GST outflows, a likely negative BOP balance in the quarter and stepped-up FX intervention. The upcoming outflow of advance tax collections around mid-month is likely to widen the deficit anew. Hence, authorities might explore available options, including either relying on ad hoc money market operations or choosing an alternative between a (permanent injection via) CRR cut, or buy-sell swaps as a sterilisation tool. We see a little more than even probability of a 25bp cut in the CRR (outside chance of 50bp). The rupee is meanwhile under pressure from USD strength and portfolio outflows. The notable drop in foreign reserves in the past fortnight highlights the scale of intervention that was required to keep the currency from breaking through fresh successive lows.
Nonetheless, one can argue that the strong build up in reserves was precisely to ‘save for this rainy day’. Pressure might also build from indications that intervention efforts have led the central bank’s aggregate short FCY in forwards and futures position to rise sharply in October and expected to climb by another $15-20bn in November. Strong official presence has supported the currency, with the INR down only -1.8% on YTD terms, amongst the better performers in the region. In a high US yield environment, a rate cut might narrow rate differentials further, creating further pressure on the INR.
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Related Insights
- An eventful week ahead for the USD13 Jan 2025
- CNY rates: Weak inflation and flattening curve 10 Jan 2025
- Rising bond yields are affecting USD and GBP differently 10 Jan 2025
Related Insights
- An eventful week ahead for the USD13 Jan 2025
- CNY rates: Weak inflation and flattening curve 10 Jan 2025
- Rising bond yields are affecting USD and GBP differently 10 Jan 2025