New Delhi [India]: The Reserve Bank of India (RBI) is likely to continue reducing the repo rate as economic growth faces potential challenges, while inflation is expected to remain within the central bank’s target range, according to a report by HDFC Mutual Fund.
The report highlighted concerns over global economic momentum, particularly in the US, where recent indicators such as the Purchasing Managers’ Index (PMI), consumption spending, and the housing sector signal a gradual slowdown.
Global Growth Concerns
The report pointed out that policy uncertainty and escalating trade tensions under the new US administration could further weigh on global economic expansion. It questioned whether the period of “U.S. exceptionalism”, marked by strong economic performance, might be fading.
“Policy uncertainty and escalating trade tensions under the new US administration might weigh on growth over time. Thus, there is increasing risk of global growth momentum decelerating,” the report stated.
RBI’s Monetary Policy Outlook
Given these global challenges, the report expects the RBI to continue its rate-cut cycle to support economic growth. Inflation is projected to stay near the central bank’s target, aided by stable core inflation and a favorable base effect, allowing room for an accommodative monetary policy stance.
“RBI is likely to continue cutting the repo rate as growth is likely to slow down while inflation is expected to durably align closer to target,” the report noted.
Banking Credit and Liquidity Trends
Another key observation in the report is the changing trend in banking credit growth. During the financial year 2023-24 (FY24) and the first half of FY25, bank credit growth outpaced deposit growth. However, this trend has now nearly converged, which could impact overall liquidity in the financial system.
To address liquidity needs, the RBI has already infused or announced plans to inject approximately Rs 5.8 trillion since early December 2024. As a result, durable liquidity in the system is expected to rise to over Rs 1.5 trillion by the end of FY25.
With the RBI’s upcoming monetary policy actions being closely monitored, the central bank will have to strike a balance between supporting economic growth and keeping inflation under control.