Monetary Policy Update (June 2013) - Key rates unchanged, policy largely a non-event... - ICICIdirect

Key policy statements...

- The central bank kept the repo rate unchanged at 7.25%
- CRR left unchanged at 4%
- The marginal standing facility (MSF) rate left unchanged at 8.25%
- The upside pressure on inflation remains going forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects.

- RBI stated that only a durable receding of inflation will open up the space for monetary policy to continue to address risks to growth.

RBI's outlook on Inflation

'On the inflation front, easing commodity prices at the global level and weaker pricing power of corporates at the domestic level are having a softening influence. Given that food inflation remains high, the inflation outlook will be influenced by concerted efforts to break food inflation persistence.'

However, the advantage gained due to easing of commodity prices has been partly offset by the sharp rupee depreciation of 6.6% during May 22 - June 11. The risk of rise in imported inflation now looms high. RBI has indicated that the inflation outlook going forward will be determined by suppressed inflation being released through revisions in administered prices, including the minimum support prices (MSP) as well as the recent rupee depreciation.

RBI's outlook on twin deficits - fiscal deficit and current account deficit

'Softer global commodity prices and recent measures to dampen gold imports are expected to moderate the CAD in 2013-14 from its level last year. The main challenge is to reduce the CAD to a sustainable level; the near-term challenge is to finance it through stable flows. The most recent number on the Centre's fiscal deficit, at 4.9 per cent of GDP for 2012-13, has turned out better than expected and instils confidence in the Government's commitment to contain the fiscal deficit for 2013-14 at 4.8 per cent. Perseverance with this consolidation should help in mitigating the twin deficit risks to the outlook.'

Our view

The repo rate cuts may be delayed by RBI on account of significant suppressed inflation, rising inflationary expectations on account of rupee depreciation and concerns over CAD. The Reserve Bank has guided that its monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead. However, we continue to believe that fall in WPI inflation is definitely positive for RBI to support growth and hence, expect a 50 bps repo rate cut in FY14E.

Source : Equity Bulls

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