RBI Heeds Higher Inflation, Leaves Rates Unchanged Once Again

As per our expectations, the RBI made no change in the key rates in its mid quarter monetary policy review announcement today (Dec 18, 2012). The repo and reverse repo rates remain at 8% and 7% respectively. The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) were also maintained at 4.25% and 23% respectively.

Here, we would like to remind our readers that in Dalal Street Investment Journal issue dated May 6, 2012 (Vol. 27, Issue No. 10), we had stated that the 25 bps rate cut in the repo rate effected in April 2012 would be the only one for CY2012, and this has what actually happened.

The following are some of the key takeaways from the press release of the central bank’s mid-quarter monetary policy review:         

• Overall, the global economy has shown some signs of stabilisation, however near-term prospects in the Euro area are still weak and there is no clarity as yet on how the US ‘fiscal cliff’ might be managed.
  
  We, at DSIJ, have provided our view on this front in our previous two Mindshare articles: Fiscal Cliff and the The Impact Of Fiscal Cliff On The IT Sector.

• Consumer price inflation remains stubborn, and the pace of moderation in wholesale price inflation has been faster than anticipated. This is evident from the fact that the CPI figure for the month of Nov 2012 increased by 15 basis points to 9.9%, while WPI for the same month decreased by 21 basis points to 7.24% on a month-on-month basis. We expect the inflation levels to persist for some time and then see some easing.
• With respect to GDP growth, there are some indications of a modest firming up of activity in Q3FY13.
• The recent policy initiatives by the government and further reforms measures should help to boost business sentiment and improve the overall investment climate. We have also been quite bullish on this front and expect the process to continue going ahead.
• In the background of inflationary pressures ebbing, the monetary policy now has to increasingly shift focus and respond to the threats to growth.
• Overall, the recent inflationary patterns and projections provide a basis for reinforcing the Oct 2012 meet guidance about policy easing in the fourth quarter of FY13. However, the risk to inflation remains, and hence, the policy stance will remain sensitive to these risks.

Commenting on the RBI’s review, Dipen Shah, Head of Fundamental Research, Kotak Securities, has opined, “RBI left policy rates unchanged maintaining status quo, in line with expectations. However, it has re-emphasised its guidance of repo rate cut in Q4. In view of a stabilising economy and tapering inflationary expectations, we expect a rate cut in January policy. We retain our expectation of 50 bps rate cut in Q4FY13 to end fiscal year with repo rate at 7.5%. However, risk to inflation at 7.5% by March remains”.

Overall, we at DSIJ believe that the RBI has taken the right step by continuing to hold its key rates. We would like to reiterate our view that the regulator should go ahead and bring down the rates only once inflation shows clear signs of softening. Hence, as of now, it would be very difficult to say whether the apex bank would slash the rates in its next meet, which is scheduled for Jan 29, 2013. However, we remain optimistic about a rate cut in the Mar quarter of 2013, as we believe that inflation would show some moderation in the next couple of months.