RBI's Strategic Rate-Cut Vision Amid Global Economic Slowdown

HDFC Mutual Fund's report suggests the Reserve Bank of India (RBI) may continue lowering the repo rate, responding to anticipated economic slowdowns and stable inflation. The report highlights global growth risks, especially from the U.S., and notes changes in banking credit growth trends impacting overall liquidity.

The Reserve Bank of India (RBI) is poised to maintain its trajectory of reducing repo rates as it navigates potential economic slowdowns and aligns inflation within its target range, according to a recent report by HDFC Mutual Fund. The report flags potential global growth deceleration, citing signs of softening in the U.S. economy.

Economic indicators such as the Purchasing Managers' Index (PMI), consumption patterns, and the housing market in the U.S. suggest a gradual downturn. "Policy uncertainty and escalating trade tensions under the new U.S. administration could potentially hinder growth over time," the report warns, increasing concerns over global economic momentum.

The analysis further questions the sustainability of "U.S. exceptionalism," a term describing recent periods of robust economic performance. The RBI, in response, is anticipated to persist with its rate-cut strategy to bolster economic growth, with inflation projections staying within target thanks to stable core inflation and a favorable base effect.

A significant highlight of the report is the shift in banking credit growth trends. While bank credit growth outpaced deposit expansion in FY24 and early FY25, this trend has now converged, potentially affecting liquidity. To address this, the RBI has infused or announced plans to inject Rs 5.8 trillion since December 2024, aiming for durable liquidity to exceed Rs 1.5 trillion by FY25's end.

The coming months will see close observation of the central bank's monetary policy decisions as it endeavors to foster economic growth while maintaining inflationary control.

(With inputs from agencies.)