RBI Policy review - It reads looks and smells like a face saving exercise - BRICS

It reads looks and smells like a face saving exercise. The RBI cut both the repo rate and CRR by 25bps, after having almost promised a rate cut in the last two policy reviews. While the RBI accepted that growth has cooled off, the policy review was interspersed with numerous risks viz. CAD, weak pick-up in investments, liquidity and inflation, including inflation expectations, so much so, that the current rate action seems like a consolation prize. Even by the RBI's own admittance, there is almost no scope for a sharp tapering-off in headline inflation, thereby providing limited room for further rate cuts. The RBI further states that inflation expectations in urban households has edged upwards in Q4, while wage inflation among the rural populace is incommensurate with the improvement in productivity, thus creating inflation pressures. On the other hand, liquidity (as defined by LAF) continues to be in deficit and higher than the comfort levels, even after a series of OMOs and earlier reduction of 125bps in CRR. This seems to be the biggest challenge, other than fiscal weakness, for the monetary policy to be effective in the near term. Barring any downward surprise in inflation, or weakness in commodity prices, we do not foresee further repo rate cuts of more than 50bps in CY13 (a total reduction of 75bps in CY13 vs. our earlier expectation of 100bps).

GDP and inflation forecasts revised downwards: In its Q2 policy meet, the RBI had revised its GDP growth forecast to 5.8% after revising it from 6.5% during its Q1 meet. The RBI believes that the initiatives taken by the government over the last few months will take some time to reverse the investment sentiments and has accordingly, further lowered its GDP growth forecast to 5.5%. The RBI has also revised its inflation target to6.8% from 7.5%, as the environment of slower growth and excess capacity in some sectors suggests that inflation has peaked and should remain range bound.

Source : Equity Bulls

Keywords