RBI Places Practicality Over Sentiment

DSIJ Intelligence / 30 Oct 2012

The RBI today announced its second quarter review of monetary policy 2012-13. It has cut the CRR by 25 bps to 4.25% and maintained status quo on the repo rate.

The RBI today announced its second quarter review of the monetary policy 2012-2013 today, which was much awaited by the market participants. The markets witnessed a heavy sell-off during the day, closing lower by more than 1% after the central bank maintained status quo for the key repo and reverse repo rates at 8% and 7% respectively. However, it slashed the Cash Reserve Ratio (CRR) by 25 basis points to 4.25%, which would be effective from the fortnight beginning Nov 3, 2012. The CRR cut would inject around Rs 17500 crore into the system, helping the banking sector to resolve its liquidity issues.

Further, the apex body revised the GDP growth estimate downward by 70 bps to 5.8% for FY2013 and inflation estimates upwards by 50 bps to 7.5% for Mar 2013. One should note that in April 2012, the RBI had forecasted GDP growth at 7.3% and the inflation estimate at around 6.5%, which was later revised downwards to 6.5% and 7% respectively in the month of July. This is the second revision of the key indicators, which clearly indicates that our economy is going through a rough phase.

The deposits growth for FY2013 is unchanged at 15% but advances growth was estimated lowered by 100 bps to 16% for FY2013. The report said that deposits growth decelerated with a moderation in interest rates, especially term deposit rates, while credit growth is fading after a slowdown in investment demand, especially with regard to infrastructure, and lower absorption of credit by the industry in general. During the first half of 2012-13, the modal deposit rates of scheduled commercial banks declined by 13 bps across all maturities and the modal base rate of banks also declined by 25 bps.


The following are some of the key points of the RBI's monetary meet:

  • Global growth prospects have deteriorated further and the downside risks have increased, even as monetary policy in advanced economies remains supportive.

  • Liquidity infusions by central banks in advanced economies is not the substitute for robust structural solutions that can return to the path of recovery.

  • Global risks have increased further and domestic risks have become accentuated by halted investment demand, moderation in consumption spending and continuing erosion in export competitiveness accompanied by weakening business and consumer confidence. This led the baseline projection of GDP growth for FY2013 to 5.8%.

  • WPI inflation was revised higher to 7.5% for Mar 2013. An important driver of inflation is the upsurge in both rural and urban wages, which is exerting cost-push pressures. Further, as under-pricing in several products is corrected as part of the fiscal consolidation process, suppressed inflation is being brought into the open.

  • Inflation is expected to rise somewhat in Q3 before beginning to ease in Q4.

  • Despite apprehensions earlier in the season, rainfall deficiency during the south-west monsoon was 8% of the long period average (LPA).

  • This uneven distribution of the monsoon has adversely impacted the kharif food-grains output, which declined by 9.8% to 117.2 million tonnes (MT) in 2012-13 on a YoY basis.

  • The early results for Q2 of 2012-13 indicate that the drop in sales growth and earnings may be bottoming out.

  • During Apr-Aug, the centre’s fiscal deficit was nearly two-thirds of the budget estimate for the year as a whole.

  • The large twin deficits, i.e. the current account deficit and the fiscal deficit continue to pose significant risks to both growth and macroeconomic stability.

  • It has been decided to increase the provision for restructured standard accounts to 2.75% from the existing 2%.

One should not expect a rate cut either on the deposits or the advances front on a immediate basis from the banks. In Dalal Street Investment Journal issue dated May 6, 2012 (Vol 27, Issue No. 10), we had stated that the rate cut of 50 bps in the repo rate effected in Apr 2012 would be the only cut for CY2012, and we continue to hold to the same. With inflation still on the higher side, we would not be surprised even if the RBI maintains status quo on the rates in its next meet scheduled on Dec 18, 2012.

Our government is playing a very hands-on role at present to revive the 'animal spirit' and bring the economy back on the growth path. We believe that the RBI governor just has taken the right stance once again by placing practicality over sentiment.

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