Expect 50 bps cut in repo rate

 Repo Rate Review June 25 - my expectations:

The Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) will be meeting in Mumbai tomorrow (04.06.25), to review the policy (repo) rate and the monetary policy stance for the next two months. RBI Governor is expected on announce the decisions of MPC on 6th June 2025.

My Predictions are:

1. Repo rate may be reduced by another 50 bps.(6.0% to 5.5%) 

My reasoning is based out of:

a. CPI Inflation is below 4% for the last three months and the level reported for April 25 (3.16%) is 84 bps less than the target rate. 

b. Normal monsoon is predicted for the current year and the rainfall across the country so far, augurs well for the farming community.

c. The average Crude Oil price (at below USD65 level) is the lowest recorded in the last three years.

d. US dollar continues to be weak. The Indian Rupee has recovered substantially against the USD and is in the range bound of Rs.84.5-Rs.85.5, since end of April 2025.

e. Forex Reserves is healthy, at above USD 685 billion levels.

f. GDP growth for Q4FY25 beat estimates at 7.4% pushing the annual GDP for FY25 to 6.5%.

g. The MPC is growth oriented in the short-term, as inflation has stabilized around the target rate.

2. Monetary Policy Stance: Status quo viz. accommodative will be maintained

Why? RBI Governor made it clear in his remarks, after the last MPC, that the monetary policy stance is more of an indicator of the policy rate going forward and not a commentary on the current liquidity position. He also said that it will be accommodative, as long as the future projection on the rate is to go in for either a reduction or maintain status quo. In this regard, the rates were cut in the last two meetings and the reduction in the rate is likely this time also. With the CPI inflation projected at 4.0% for FY26, status quo or rate cut may be the decision in next few MPC meetings. Hence, the stance may remain unchanged.  

3. Liquidity easing measures: I do not expect any rate reduction in CRR  or other measures to boost liquidity, as the  position remains comfortable, evidenced by the following.

i. The average SDF placed by the banking system is Rs. 1.58 lac cr. in the second fortnight of May 25.

ii. Net durable liquidity in the system is reported at Rs.3.48 lac cr. 

iii. Call money rate, an indicator of easy liquidity, is more nearer to the SDF of 5.75% than the repo rate of 6.0%

iv. No impact on on the net interest margin (NIM) of the banks is forecast, as the transmission of policy rate cut appears to be faster in deposit rates (as compared to advance rates).

I would like to add that my predictions about the proposed MPC review meeting, need not be reflect my views on the decisions that may finally emerge in the said meeting.  

Regards

V. Viswanathan
CGM Retd. e-SBT

3rd June 2025.

Comments

  1. Ratan N V LJune 4, 2025 at 11:39 PM

    While borrowers may be happy with the cut in REPO, senior citizen depositors (who depend on safe and secure return) are going to be unhappy with a further fall in interest on deposits.

    ReplyDelete
    Replies
    1. ViswanathanJune 5, 2025 at 12:27 AM

      Thank you. You are right. Will offer my comments next week.

      Delete

Post a Comment

Popular posts from this blog

IBC resolutions and haircuts

Image
  What should be the yardstick to evaluate haircuts in IBC  Recovery versus Total Admitted claims - a fallacy: Recently, one of the largest bank employees' union in India, came out with a list of business firms, said to have been acquired by a business conglomerate through resolutions/liquidation effected under IBC (Insolvency and Bankruptcy Code), with a statement that the business group is the beneficiary at the cost of the banks concerned (average haircut 74%). While the fight against huge haircuts in the banking books (in the resolution process under IBC) by the bank employees' union is understandable, I did not subscribe to the view that was being impressed upon  (in their circular)  that the process was done in order to help one particular beneficiary. Right from the beginning, the resolutions  done through IBC witnessed haircuts ranging from 40 to 80% and the said list, at best, is only  an affirmation to the general trend since the beginning of the...
Read more

An open letter

  An open letter to DFS or RBI or to whom? Perceived, yet undefined, "conduct and behaviour" determine or detrimental to selection?:   It has been reported in the newspapers that Financial Services Institution Bureau (FSIB) is conducting interviews for the positions of MD & CEO in four public sector banks (PSBs), including that of Indian Bank (IB), where the present MD & CEO is retiring on 31st December 2024. Conduct of interviews for the position of MD & CEO of IB raised a few eyebrows in the banking circle, as the name of the ED of Bank of Maharashtra (BoM) was shortlisted by the FSIB for the said position in April 2024. The news item further reported that the decision of FSIB could not be completed to its logical conclusion, since Reserve Bank of India (RBI) appear to have taken a stance (in its communication to FSIB) that the "behaviour and conduct" of the said official "was not befitting his position and responsibilities concerning regulatory c...
Read more

The woes of an Indian urban senior citizen

Image
  The woes of an Indian Urban Senior Citizen (Below created characters and conversations are purely imaginary; might or might not reflect reality; Intention is not to hurt anyone, but to generate a debate. If it hurts anyone, my sincere apologies to him/her) After the imaginary interview with me on RBI Policy* in April 2025, the late Mr. Art Buchwald (AB) was restless in the heaven.  He  called me over phone (in my dream) yesterday, to convey that he would like to interview an Indian consumer to confirm the 'rosy' picture of the Indian Economy, as certified by the government, RBI, economic experts,  through their statements and opinions. I agreed to his request. Unfortunately, he bumped into an Indian urban senior citizen(USC), known for his (arm chair) expert views on the stock market, mutual funds and economy, but placed his savings, only with the scheduled commercial banks (SCBs) and post office savings schemes.  Excerpts of the (imaginary) interview are as u...
Read more