RBI may begin rate easing cycle with 25 bps cut, add durable liquidity: Morgan Stanley

Morgan Stanley on Tuesday said that it expects the Reserve Bank of India (RBI) to commence the rate easing cycle with a 25-bps rate cut, reflecting the current domestic growth-inflation dynamics.

In addition, “we expect the Central bank to add durable liquidity and keep a close watch on currency to limit excessive volatility,” said the global financial services leader in a note.

The RBI's Monetary Policy Meeting (MPC) is scheduled to take place on February 7 and global brokerage expects the MPC to retain its neutral stance, adding that the consensus is also penciling in a rate cut from February.

Headline Consumer Price Index (CPI) softened to 5.2 per cent Year on Year (YoY) in December 2024, led by slowing food prices and core CPI inching down.

“We expect disinflation in food prices to gather further pace and thereby support the disinflationary momentum in headline CPI as it averages 4.5 per cent YoY in QE March 2025 (in line with the RBI's estimates of 4.5 per cent),” said Morgan Stanley.

In order to ensure orderly liquidity management, the RBI has taken measures such as Voluntary Retention Routes (VRRs) of higher quantum, daily VRR since January 16, buyback of government securities (Rs 750 billion in January) and purchase of government securities in the secondary market (Rs 102 billion in January).

Furthermore, the RBI has also announced additional measures such as Open Market Operation (OMO) purchases worth Rs 600 billion, 56-day VRR of Rs 500 billion, and buy/sell swaps of Rs 5 billion.

The global investment bank said in its note that it expects the RBI to embark on a shallow rate easing cycle.

“The confluence of domestic growth-inflation dynamics – weaker-than-anticipated growth and a moderating inflation trajectory – warrant rate easing to support growth, in our view,” said the note.
However, this is juxtaposed against an adverse external environment, as demonstrated by dollar strength, higher for longer stance of the Fed, and volatility in global capital flows leading to weakness in the currency.

“Therefore, in our base case, we continue to expect a shallow rate easing cycle of a cumulative 50 bps, starting from February. In addition, we expect the RBI to continue to undertake liquidity management, in an attempt to mitigate outflows resulting from FX intervention and ensure that domestic financial conditions do not tighten significantly,” the brokerage noted.