Investors Eye On - World's Major Central Banks - RBI Stance?

The world’s central banks are on a roll, making moves to boost their respective economies. In the current business environment, the world has become more integrated in nature wherein the action of one country is likely to produce a reaction in another. At present investors all over the world are eyeing the steps being taken by the various central banks which could provide them with cues to finalize their investment decisions. The various banks’ action includes some of the recent perspectives from Australia, China, European Central Bank and the U.S. It is now the turn of India’s Reserve Bank of India (RBI) to provide a verdict and outlook for the world and on Indian economy.

The first salvo was from Australia’s central bank when, on June 5, it slashed its interest rate by 25 basis points to 3.5 per cent. This was followed by the European Central Bank (ECB) which kept the rate unchanged as it was of the opinion that it could not compensate for policy inaction from the respective euro regions with regards to the sovereign debt crisis. ECB suggested that the euro leaders should take some quick steps in order to boost the euro zone economic sentiments which would further help them to come out from the sovereign debt crisis.

After that it was the much-awaited U.S. Fed Chairman Ben Bernanke’s speech. Bernanke, however, chose to remain silent on the third round of quantitative easing (QE III) and said that at present the economy does not need QE and he might consider the same going ahead if the economic environment deteriorates from here on. And lastly it was the surprise cut by the Chinese government which slashed its rates for the first time in four years. China reduced its benchmark interest rate by 25 basis points and the step signifies that the economy is facing a serious slowdown.

Now it’s time to ponder over what will be the RBI’s move in its monetary meet scheduled for June 18? Will the RBI cut the repo rate or the cash reserve ratio (CRR) or both? Will the RBI go with the Asian economies’ trend (i.e. slash the rates as China and Australia) or will it take the developed economic stance (of the U.S. and Europe keeping the rate unchanged)? Or will it make a move looking at the domestic headwinds faced by the economy – a critical factor in the decision making process.

Our view is that the RBI should first look at the domestic environment which we believe is of utmost importance and we think that it should keep the rates unchanged. Most of the market experts and analysts expect the RBI to cut the rate, which will further fuel growth in the economy. Our economy is integrated with the macro environment and is facing a serious slowdown of pace. This is evident from the fact that the March quarter GDP growth came in at 5.3 per cent as against the street expectation of 6.1 per cent. Further, many of them have revised the FY13 GDP growth in the range of 6.5 to 7 per cent as against the previous government’s estimate of 7.6 per cent.

Having said that, we at DSIJ believe that inflationary pressure still continues to hover above the economy and hence there is a possibility of this force moving northwards again. The wholesale price index (WPI) came in at 7.23 per cent and the consumer price index (CPI) at 10.36 per cent for the month of April 2012. With the hike in petrol prices at around Rs 5.50 (Rs 7.50 less roll-back of Rs 2), this has further raised the potential risk of inflation. No doubt Brent crude is under the USD 100 mark, yet it still carries the potential to go higher as the slashing of the rate in China will drive consumption. The monsoon this year is expected to be normal but forecasting natural events is extremely difficult and hence one has to adopt a ‘wait and watch’ approach. The key factors to look out for include the index of industrial production (IIP) numbers for the month of April on June 12, 2012 and the inflation numbers i.e. WPI and CPI data for the month of May which would be released on June 14 and 18 respectively.

One should note that the market in the past has appreciated handsomely on the back of some positive global events and also on the back of investors’ speculation of the RBI cutting the rates, and hence if the RBI keeps the rate unchanged one may see a correction in the market. We at DSIJ believe that our economy is still under inflationary pressure and this, coupled with issues regarding our balance of payments, would make it challenging for the RBI to make the right move. Therefore, we expect the RBI to maintain a status quo in its policy meet. Lastly for our Investors we have given a list of 24 countries with their current Interest rate for their information.