Key Points
RBI to persist with rate cuts amid economic headwinds
Inflation aligning with central bank targets
US economic slowdown risks global growth
Bank credit and deposit growth trends converge impacting liquidity
The report highlighted that global growth momentum is at risk of slowing, particularly as economic conditions in the US begin to show signs of softening.
The report noted that while US economic growth has remained relatively stable, recent data points, including Purchasing Managers' Index (PMI), consumption spending, and the housing sector, indicate a gradual slowdown.
It said, "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 raised concerns about whether the period of "U.S. exceptionalism"--a phase of strong economic outperformance--may be fading.
Additionally, policy uncertainty and rising trade tensions under the new U.S. administration could weigh on economic expansion over time, further contributing to global growth concerns.
In this context, the report says that the RBI is expected to continue with the rate-cut cycle to support economic growth. The report adds that inflation is expected to remain close to the central bank's target, aided by stable core inflation and a favorable base effect. These factors provide room for the central bank to maintain an accommodative monetary policy stance.
The report said "RBI is likely to continue cutting repo rate as growth is likely to slow down while inflation is expected to durably align closer to target"
Another key observation in the report is the changing trend in banking credit growth. In the financial year 2023-24 (FY24) and the first half of FY25, bank credit growth was significantly higher than deposit growth. However, this trend has almost converged, which could have implications for overall liquidity in the financial system.
To ensure sufficient liquidity, the RBI has already infused or announced plans to inject approximately Rs 5.8 trillion since early December 2024. With these measures, durable liquidity in the system is expected to rise to over Rs 1.5 trillion by the end of FY25.
The central bank's monetary policy actions in the coming months will be closely watched, as it balances the need to support economic growth while keeping inflation in check.
