ECB cuts rates, RBI expected to reduce repo by 25bp - Angel Broking

In line with consensus expectations, the European Central Bank cut its key policy rate – the interest rate on the main refinancing operations by 25 basis points to 0.50% from 0.75% in its monetary policy meeting on May 2, 2013. It has also decided to lower interest rate on the marginal lending facility by 50 basis points to 1.0%. Economic activity in the Euro area has remained weak as real GDP declined by 0.6% qoq in 4QCY2012 as against 0.1% qoq in the preceding quarter. Pace of monetary expansion also continues to be subdued with moderation in broad money growth to 2.6% in March, from 3.1% in February. More importantly, there is no imminent risk seen to inflationary pressures picking up on account of the accommodative monetary policy stance since inflationary expectations over the medium-term are firmly anchored close to the 2% inflation target. Headline euro area annual CPI inflation decelerated for the fourth month and stood lower at 1.2% in April 2013 down from 1.7% in March 2013 and 1.8% in February.

The Reserve Bank of India (RBI) in its Macroeconomic and Monetary Developments Statement concurred that the pace of recovery in economic growth during FY2014 is likely to remain slow. WPI inflation has moderated and come in at 6.0% in March 2013 lower than the RBI's own assessment of year-end inflation at 6.8%. Going ahead too with benign outlook for global commodity prices, headline WPI inflation is likely to mark a downward bias in the near-term. in addition, we believe that the government's moves towards fiscal consolidation and expected improvement in the CAD in 4QFY2013 after reaching a record-high 6.7% of GDP (on account of a moderation in trade deficit) are favorable factors for a more growth-supportive policy stance. In view of this, we expect the RBI in its Annual Monetary Policy Review tomorrow to reduce the repo rate by 25bp from 7.50% to 7.25%.

We see the deceleration in crude oil prices particularly as a key positive for the CAD and fiscal deficit. With improvement in crucial macroeconomic indicators, we believe risks faced by the economy in FY2013 from twin deficits and inflation are receding. The Reserve Bank underscores six risks to the macroeconomic situation 1) monetary stimulus being restrained as CAD is still above comfort level, 2) subnormal monsoon despite forecast of normal monsoon, 3) supply-side impediments, 4) revenue shortfall as growth remains sluggish, 5) capital outflows in the event of global risks, and 6) pick-up in global inflationary expectations from stimulus push.

Source : Equity Bulls

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