RBI MPC’s decision to cut CRR by 50 bps while leaving interest rates unchanged was in line with market expectations. Lower growth projections by RBI (and we may see some downside surprises here) set the tone for a rate cut in the coming MPC meetings – by which time RBI will be hoping that inflation will come under better control.
While GoI’s spending will catch up in 2HY24-25 after an elections-induced slowdown in 1HY, RBI’s decision to crack down on unsecured retail lending has perhaps impacted credit growth with incremental CD ratio now only at 60% (vs 100% same time last year). Stress in urban consumption is also another worry that is keeping GDP growth in check.
Currency is RBI’s key worry now. Its not just about recent FII outflows – there are many variables around impact of trade policies under the new US administration, China’s trade policies, oil, US interest rates and so on – which are keeping RBI on its toes on currency management and contributing to their cautions stance on interest rates.
Growth slowdown in India to the 6-6.5% range does not warrant deeper-than-expected rate cuts. RBI is expected to cut perhaps total of 50 bps in two tranches in first half of FY25-26. Our new normal growth rate expectations should be in the 6.6.5% range and not 7-7.5%. Strong global growth outlook for 2025 led by US is also likely to prevent steep rate cuts in US.
Devang expects the yield curve to remain flat, perhaps even seasonally invert in March and once rate cuts happen in FY25-26, we should see the yield curve steepen as near term yields fall.
His advice to investors:
For parking solutions, continue with money market funds
For tactical investors who want to ride the rate cut cycle, gilt funds and long duration funds are suitable
For HNIs with committed debt allocations, short to medium term funds and corporate bond funds make sense.