RBI maintains LAF Repo Rate at 8% - IDBI Bank

At the Mid-Quarter Monetary Policy Review - December 2012 held today, the RBI decided to maintain the LAF Repo Rate at 8.00%. In consequence, the LAF Reverse Repo Rate and the rate of Marginal Standing Facility remained unchanged at 7.00% and 9.00% respectively. The CRR too was kept unchanged at 4.25%.

Policy Assessment

A dash of uncertainty was added to today's review in the wake of the WPI inflation reading for November surprising significantly on the downside. A segment of the market was thus hopeful of some downward move on interest rates in today's Mid-Quarter Review itself. This was despite the RBI guidance at its Second Quarter Review, which saw possibilities of interest rate easing beginning earliest by the third quarter of current fiscal. As regards a cut in CRR; it too was being debated as the current tightness in liquidity (in wake of advance tax outflows) was expected to be managed through the Open Market Operations of the RBI.

While analyzing the past six weeks since the Second Quarter Review, the RBI cited the growth as remaining "significantly below its recent trend" despite some "incipient signs of pick-up" in activity. On the other hand, the inflation at wholesale level showed positive developments. Here, the RBI especially highlighted the past two months' (October & November) reading on WPI, which was below the projected trajectory. The bigger comfort then was drawn from the considerable moderation observed on core inflation levels, which in turn was a factor of "excess capacity in some sectors". However, the RBI continued to express concern on inflation at the retail level (CPI), particularly on the food front (vegetables, cereals, pulses, oils and fats).

Discussing liquidity at today's review, the RBI continued to emphasize that the current tightness in liquidity was a factor of "large government balances with the Reserve Bank and the widening wedge between deposit and credit growth". Here, the RBI also stated that it would continue to mange liquidity "with a view to supporting growth as stated in the SQR, thereby preparing the ground for further shifting the policy stance to support growth".

As regards the outlook for the economy, the RBI expressed considerable concerns on the external front. Especially the impending fiscal cliff issues in US and the continued weakness in the Euro Area. Here, the RBI specifically stated that the "biggest risk to the outlook (global) stems from political economy considerations that could impede, delay or erode resolute policy action".

Outlook

Today's policy review has once again reiterated the monetary policy guidance put out by RBI at its Second Quarter Review held in October 2012. Accordingly, we maintain our projection of a 50bps cut in interest rates by the end of this fiscal; with a higher possibility of the easing cycle being initiated at the upcoming Third Quarter Review. At the next review, especially if the WPI inflation continues with current trend, the RBI could also revisit the year end WPI inflation projection and accordingly consider its downward revision.

Source : Equity Bulls

Keywords