Currency volatility & CAD main reasons to desist from a rate cut - Dalal & Broacha

The RBI's mid-quarter policy review highlights concerns of weakness in manufacturing sector and the still stalled investment cycle, which should have resulted in a dovish stand. However, the recent volatility seen in the INR, due to the ruling high CAD level are the main reasons for the RBI to take the decision to maintain status quo.

The policy notes that the WPI inflation has ebbed adequately (WPI inflation eased to 4.7% in May down from an average of 7.4 % in FY13, down 270 bps) including the oft-noted non food manufactured products. Still, it caveats that the elevated food inflation can be a cause of worry. The CPI is still high at 9.3% in May, and has declined by just 90bps so far from an average of 10.2 % FY13.

We believe that the inflationary implications of currency depreciation (~7% since May 22), frequent adjustments in administered prices of food grains & fuels and the persistent food inflation, have limited RBi's efforts to lower rates and boost growth.

Outlook

We believe that in the near term, there is little scope for monetary policy easing in H1 FY14 due to 1) retail inflation in general and food inflation in particular, 2) Global uncertainties, especially the economic situation in the US and the QE program of the Federal Reserve, and the 3) CAD / BOP weakness for India.

However, good monsoons, good inflows & CPI base effect may help rein in the food inflation, which will be crucial for paring rates further.

We expect no rate cuts in the next Monetary Policy meeting which is on July 30, 2013.

Source : Equity Bulls

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