Morgan Stanley Anticipates RBI to Enhance Liquidity and Implement Second Rate Cut in April
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Synopsis
Morgan Stanley forecasts that the RBI will introduce additional liquidity measures before March's conclusion and anticipates a 25 basis point repo rate cut in April, following its recent policy rate adjustment to 6.25 percent.
Key Takeaways
- Morgan Stanley predicts further RBI liquidity measures.
- Another 25 bps repo rate cut expected in April.
- RBI's focus remains on growth and inflation alignment.
- Proactive liquidity management anticipated as March concludes.
- Potential for a prolonged rate cut cycle if growth falters.
New Delhi, Feb 7 (NationPress) On Friday, Morgan Stanley projected that the RBI will implement further liquidity measures ahead of the end of March, along with a potential 25 basis points decrease in the repo rate in April, following a recent reduction of the policy rate to 6.25 percent earlier that day while maintaining a neutral stance.
In a unanimous decision, the MPC initiated a cycle of rate easing with a 25 bps cut, aligning with both our and consensus predictions. Additionally, the MPC upheld a neutral stance, demonstrating their commitment to a consistent alignment of inflation with targets while fostering growth, considering the current dynamics of domestic growth and inflation, as outlined in the Morgan Stanley report.
Such growth-inflation dynamics provide the MPC with the opportunity to bolster growth while focusing on inflation alignment.
Although today's policy announcement did not introduce new liquidity-enhancing measures, the Governor's statement suggested a commitment to providing "sufficient" liquidity and adopting "proactive" strategies to support liquidity, according to the report.
The rate easing aligned with expectations amid weaker-than-expected domestic growth and declining inflation trends. Moreover, the RBI has utilized its tools to inject liquidity (Rs1.5 lakh crore) while hinting at a more lenient approach to certain upcoming regulations.
"We believe that the RBI is fostering growth through rate cuts, relaxed regulations (postponing new guidelines), and ensuring adequate liquidity (anticipating further actions). We predict another 25bps rate cut in April, which could potentially mark the final cut," the report indicates.
Additionally, it mentions that the RBI is likely to proactively oversee liquidity and consider additional measures (OMO purchases/FX swaps) as the liquidity shortfall approaches the end of March. "There is a risk of an extended rate cut cycle if the recovery in growth remains sluggish, driven by decreased domestic demand and global uncertainties," the report elaborated.
To substantiate its claims, the report referenced the RBI Governor's remarks on the regulatory landscape, emphasizing the need to balance stability and efficiency during regulatory formulation.
