Despite the slowdown in the economy and moderating inflation, the Reserve Bank of India (RBI) on Tuesday chose to leave the key repo rate unchanged at 8% and the cash reserve ratio (CRR) at 4.25%. However, there were strong hints that the policy rate might be lowered in January. The central bank also reassured the money market that it would ensure enough liquidity, ostensibly through open market operations (OMO). “With inflationary pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards,’ the RBI observed in a statement, adding there was a case for reinforcing its October guidance of easing policy in the fourth quarter.
Expectations of a policy rate cut in end-January – perhaps by as much as 50 basis points – boosted the sentiment in the stock market driving up the Sensex by120 points to 19,364.75 points. The bond markets were comforted by the assurance of adequate liquidity and the yield on the benchmark bond stayed more or less flat at 8.15%.
Most bankers, however, are likely to wait for a signal from the central bank before trimming lending rates despite the fact that loan growth has been muted. State Bank of India (SBI) chairman Pratip Chaudhuri told a business channel that demand for loans from companies remained sluggish while Aditya Puri, MD& CEO, HDFC Bank said base rates would come down as soon as costs were lower.
The central bank’s comments on growth — it believes there have been signs of a pick-up in growth in the last couple of months and that the economy was tracking the projected 5.8% GDP growth for 2012-13 — have convinced economists that the RBI will cut rates by 50 basis points in the first quarter of 2013.
“We maintain our view of a 75 basis points cut in 2013 and expect 50 basis points between January and March,” Rohini Malkani, economist at Citigroup, observed.
In its mid-term assessment, the government on Monday cut the GDP estimate for 2012-13 to between 5.7 and 5.9% from the earlier 7.6%. Factory output between April and September has grown at just 0.7% though it jumped 8.2% y-o-y in October largely due to a base effect. GDP for the September quarter came in at 5.3% higher than the 5.5% for the June quarter.
“The RBI has taken a cautious stance on easing policy rates because retail and wholesale inflation have shown contradictory trends,” C Rangarajan, chairman of the Prime Minister's Economic Advisory Council observed, adding “perhaps the RBI wants to start a policy, of cutting rates, that could be continued. Wholesale inflation for November came in at 7.24% with core inflation at a three-year low of 4.5%.
Leif Eskesen, chief economist for India and ASEAN at HSBC said: “The RBI kept policy rates on hold in light of the persistence of inflation and lingering upside risks to inflation. However, it is gearing up for potential policy rate cuts early next year, assuming inflation risks recede and policy progress on other fronts is sufficient.”