Is A Rate Cut Imminent?

In the recent past, the Indian government has taken bold steps by bringing in some much-awaited reforms measure to drive the economy back on growth track. With a renewed sense of optimism on D-Street, will the RBI join hands with the government and bring down the rates? Market consensus as well as some of the indicators seem to suggest that we are looking at a distinct possibility of a rate cut in the apex bank’s next meet scheduled on Jan 29, 2013.

On Jan 1, 2013, the benchmark 10-year government securities (G-Secs) moved lower than 8%, making a 20-month low. Media reports said that this was majorly because the government postponed its bond auction and the RBI announced its open market operations (OMOs). The 10-year G-sec rates have remained almost unchanged today (Jan 2, 2013) too, trading at 7.99%.

10-year G-Secs are usually considered as the leading indicators, and with the yield on them softening, there could be a (repo) rate reversal in the offing. However, we believe that one has to watch out for the inflation numbers and the Index of Industrial Production (IIP) data, which would be out before the RBI’s policy meet.

The Wholesale Price Index (WPI) inflation and Consumer Price Index (CPI) inflation numbers for the month of Dec 2012 is expected to be out on Jan 14, 2013. WPI has shown signs of softening, decreasing from 7.81% for the month of Sept 2012 to 7.45% for Oct and 7.24% for Nov, and is also below the RBI’s projections of 7.5% for FY2013. If the WPI number for Dec 2012 sees further softening, it may send out a positive signal in this direction to the RBI.

The IIP data for the month of Nov 2012 would be released on Jan 11, 2013. The figure for the month of Oct 2012 came in at 8.2%, which was much higher than the street’s expectations of around 4.5%. However, this could also have been a one-off due to the festive season.

We believe that if the inflation and IIP data shows signs of moderating, there is a very high possibility that the RBI might go in for a rate cut in its upcoming meet.

Another encouraging signal is emerging from banks, which are reducing their rates. For instance, HDFC Bank has reduced its base rate by 10 basis points to 9.7%, making loans cheaper for borrowers.

Given these factors, there is a clear sense of optimism with regard to lowering of the repo rates. However, one has to watch out for other macroeconomic data, which would help the regulator to take an appropriate decision.

We will keep our readers posted as the data comes in over the next fortnight. Watch this space for more.