RBI Credit Policy reaction - Anand Rathi Financial Services

END OF THE BEGINNING - By Sujan Hajra,Chief Economist, Anand Rathi Financial Services

"Despite surprising the market by the aggressive 50 basis points (bps) policy rate cut, the first in the three years, the Reserve Bank of India (RBI) seems to be done with monetary easing for the year. Rising food (fruits & vegetables, pulses and edible oil) prices, waning of favorable base effect for core inflation and impending hike in fuel prices (in the face of the record under-recovery) would keep the inflation high. We expect inflation to remain around 8% for most of the year limiting possibility of further rate cut.

The RBI, however, is likely to maintain an accommodative stance on liquidity through open market operations (infusing Rs.200, 000 crore) and cuts in cash reserve ratio (by 100-200 bps) during the year. These measures are likely to ease the tight liquidity situation and thereby reduce market interest rates. The banking sector liquidity, net bank borrowing from the RBI under the liquidity adjustment facility, is likely to turn positive at some point of the year, resulting in 100 bps fall in the effective policy rate as reverse-repo becomes the effective policy rate in place of repo rate. The RBI's guidance on GDP growth for the year at 7.3% seems aggressive while the guidance on year-end inflation at 6.5% looks conservative."

Source : Equity Bulls

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