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RBI may cut policy rate by 25 bps, feels market

Source : BUSINESS_STANDARD
Last Updated: Thu, Apr 12, 2012 20:13 hrs

There is an expectation among many that the Reserve Bank of India (RBI) would cut the repo rate (at which it lends to banks) by 25 basis points in its annual policy review meeting scheduled on Tuesday, to boost growth in the economy.

After increasing the policy rate 13 times between March 2010 and October 2011, to 8.5 per cent, the central bank made no change in its last two policy reviews. Quite a few economists and market participants believe the high global oil prices may act as a deterrent for a rate cut, but, the cost of not cutting is also rapidly rising. reflected, for instance, in slowing economic activity. “Today’s weak IIP (Index of Industrial Production) data, along with lower core inflation, should cement the case for a rate cut, as the cost of not cutting rates is rising. We expect a 25-bps repo rate cut and no change in the Cash Reserve Ratio (the portion of their reserves banks must keep instead of lending) on April 17,” said economists Sonal Verma and Aman Mohunta of Nomura Securities.

Factory output data for February was 4.1 per cent, lower than the consensus estimate. The trend in recent months suggested interest rate-sensitive consumer durables goods’ output growth had fallen sharply. Economists expect March industrial production data to also be weak.

“Overall, we think growth momentum in the economy is weak, though not as weak as in the last quarter of 2011…we think RBI will be willing to support growth by cutting the repo rate by 25-bps in the coming monetary policy meeting, unless the March inflation number surprises sharply to the upside,” said Taimur Baig and Kaushik Das, economists with Deutsche Bank.

The inflation figures for March, to be released a day before the policy meet, would be a key input for the central bank’s decision. The market is expecting slightly lower inflation in March, but core or non-food manufacturing inflation could see a sharp decline.

Treasury officials said the bond market had factored in a 25-bps rate cut, as yields on government paper fell sharply on Thursday following the poor IIP numbers. Yield on the 10-year benchmark government paper closed at 8.44 per cent, about 11-bps lower than yesterday’s close.

“Bond markets have discounted a 25bps rate cut in the annual policy because of poor industrial production numbers. So, markets are expecting RBI to cut rates to support growth,” said T S Srinivasan, general manager-treasury at Indian Overseas Bank. He added the uncertainty on the government being able to reign in the fiscal deficit might limit RBI’s comfort in starting the monetary easing cycle. During its mid-quarter review, RBI had said a credible plan for fiscal consolidation was essential to have lower inflation.

“The inflation risks are legitimate and in our opinion, should be an important factor in determining essentially the magnitude of rate cuts by RBI. As such, we expect RBI to ease rates by 50-75 bps in FY13,” said a YES Bank note, adding that a weak outlook on growth warranted commencing of monetary easing, by cutting the policy rate 25 bps on Tuesday.

Market participants, however, are ruling out a cut in CRR, as liquidity has improved in April. This is reflected in lower borrowing from RBI’s repo facility. CRR was reduced by 125 bps to 4.75 per cent since January, to ease tightness.

Banks’ daily borrowing has fallen from about Rs 2 lakh crore in March to Rs 80,000 crore-1 lakh crore in the current fortnight. The overnight call money rates have eased from around 10 per cent to nine per cent in the same period. Market participants said government spending in the form of bond redemptions helped in easing the liquidity pressures.

In the first week of April, about Rs 27,000 crore of inflows came as the government redeemed maturing bonds. Another Rs 34,000 crore worth of redemptions are due next month.




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