RBI misses window of opportunity to cut rates - Motilal Oswal

CRR cut of 25bp may take liquidity to surplus mode; policy stance turning neutral

- The RBI left policy rates unchanged, citing that government measures were well anticipated and that it had frontloaded its actions, with a 50bp rate cut in April 2012. However, it eased CRR by 25bp to 4.5%, releasing liquidity of INR170b into the system. It noted that while higher growth risk warrants monetary easing, it is constrained by persistent inflationary risks, twin deficits and evolving global situations.

- The RBI has stayed put on the policy front for the third time in a row. It seems to have missed the window of opportunity to cut rates, as headline inflation is expected to firm up to ~8% in the coming months. On the liquidity front, however, the RBI has eased considerably, with 150bp CRR cut in the last six policy events of 2012 and has also injected INR800b through open market operations (OMOs).

- These measures have brought liquidity to the neutral zone. We expect liquidity to enter into surplus mode, as bank credit slows down and the RBI continues with its OMOs. The market interest rates (including money, credit and government securities market) are expected to soften on the back of this.

- As the policy stance enters into neutral zone, we expect ambiguity to creep into the assessment of the domestic and global economy, resulting in increased complexity of monetary policy making. We have tempered our rate cut expectations for the remaining part of FY13 to 50bp from 75bp earlier. We however, continue to expect another INR1t of OMOs to improve the liquidity situation.

Source : Equity Bulls

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