RBI maintains status quo on rates; along expected lines - Angel Broking

As expected, the Reserve Bank of India (RBI), in its Mid Quarter Monetary Policy Review, maintained status quo on policy rates. The key policy rate ie Repo Rate stands unchanged at 7.25%. Consequently, the Reverse Repo Rate stands unchanged at 6.25% and the Marginal Standing Facility Rate and Bank Rate stand unchanged at 8.25%. The Cash Reserve Ratio continues to remain at 4.00% of banks' NDTL. The RBI has maintained its cautious guidance and indicated that its policy stance would be determined by the 1) growth, 2) inflation and 3) balance of payments (BoP) situation. We expect an additional 50bp repo rate cut in FY2014; the timing of the same is likely to be data-determined.

Policy cautious ahead of inflationary and BoP risks

Despite the considerable moderation in headline WPI inflation (to 4.7% in May 2013 from an average of 7.4% in FY2013), the RBI has maintained a cautious stance in its policy. This can be attributed to 1) anticipation of upside pressures on inflation through second-round effects and 2) risk of a reversal in capital flows. Since May 2013, the INR has depreciated by 7% and this is likely to offset the positive impact of softening global commodity prices and stoke imported inflation. Our trade deficit for April and May 2013 has widened to USD37.9bn as against USD30.9bn in the corresponding period of the previous year. In addition, as the RBI acknowledged, capital flows have moderated "reflecting risk-off sentiment triggered by apprehensions of possible tapering off of quantitative easing by the US Fed". So far in June, the equity markets have witnessed capital outflow of USD156mn by foreign institutional investors (FIIs) as against a robust inflow of USD3.8bn by them in May 2013.

The RBI has also emphasized upside risks to inflation from second-round effects of high food prices and the recent increase in administered fuel prices on the overall trajectory of inflation. In this context, we believe that 1) the onset of a normal monsoon, 2) decent rabi production in FY2013 and 3) expectations of moderate hikes in minimum support prices (MSP) are likely to support moderation in food inflation and reduce the divergence between Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation.

Policy stance to be determined by growth, inflation and BoP

The RBI reiterated that its policy stance would continue to be determined by the trajectory of growth and inflation as well as assessment of the BoP situation. We expect additional repo rate cuts of about 50bp in FY2014; the timing of the same is likely to be data-determined. We expect the trajectory for inflation to remain in the RBI's comfort-zone. We believe that as prices have eased, the demand for gold is likely to be front-loaded and a likely moderation in gold imports going forward along with stabilization in the INR are likely to narrow the trade deficit. This could provide the RBI with headroom to cut rates in July 2013.

Source : Equity Bulls

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