Rate cut expected in Q3FY25, liquidity management will be a challenge for RBI: SBI Research

New Delhi [India], June 6 : SBI Research, in its recent analysis, predicts that the Reserve Bank of India (RBI) is likely to initiate its first rate cut in the third quarter of the financial year 2024-25 (Q3FY25).
This projection stands out as an exception compared to the trend observed in other emerging economies, where central bank rate actions typically mirror those of advanced economies.
However, SBI Research anticipates that when the rate cut cycle does commence, it will likely to be shallow.
Regarding the RBI's stance on the repo rate for monetary policy to be announced on Friday, SBI Research suggests that the central bank should continue with its approach of withdrawing accommodation.
This recommendation aligns with the strong evidence observed in other emerging economies. However, India's trajectory diverges, with the forecasted rate cut cycle expected to commence later than in other nations.
Liquidity management will remain a pressing concern for the RBI, especially with the impending implementation of the Just in Time (JIT) mechanism.
This mechanism, designed to keep government cash balances out of the banking system, is anticipated to have an impact on liquidity dynamics.
Additionally, the spectre of capital flows in FY25 poses both challenges and opportunities for RBI liquidity management. SBI Research recommends that temporary liquidity injections should replace temporary liquidity withdrawals to effectively manage this conundrum.
In terms of regulatory efficiency, the RBI ranks among the top three regulators in managing inflation, according to SBI Research.
The SBI research analysis suggests that achieving a 7.5 per cent growth rate for FY25 seems plausible, with average inflation projected at 4.5 per cent.
To address the evolving liquidity landscape, the RBI may need to employ more innovative tools, particularly as government cash balances are expected to remain outside the banking sector due to the JIT mechanism.
The banking sector's performance in FY24 has been commendable, with credit growth remaining robust at 19.5 per cent as of May 17, 2024, compared to the previous year's growth of 15.4 per cent.
Public sector banks (PSBs) have particularly excelled, with cumulative profits crossing Rs 1.4 trillion in the financial year ended March 2024, marking a growth of 35 per cent over the previous year.
Looking ahead, SBI Research anticipates healthy credit growth in the range of 14-15 per cent in FY25, albeit with some moderation due to higher interest rates and regulatory actions by the RBI.
Furthermore, while the deposit growth is expected to continue lagging behind advances, the narrowing credit-to-GDP gap reflects improved credit demand in the economy, particularly in the manufacturing sector.
In the global economic landscape, political risks are anticipated to dominate, particularly in the United States. The trajectory of US policies in the latter half of 2024 is expected to polarize on key issues, impacting future prospects for emerging markets and trade dynamics.
The Chinese economy is showing signs of resurgence, with growth expected to pick up in both 2024 and 2025.
The SBI research report however gave a disclaimer, that the views expressed in the report are those of the research team and do not necessarily reflect those of the bank or its subsidiaries. The contents are based on information procured from various sources, and no liability is accepted for the accuracy of facts and figures.