DSIJ Expects 25 Basis Points Repo Rate Cut

One must note that on the back of these expectations a 25 basis points rate cut is already factored in the market. However, the RBI governor Subbarao, has a tendency to surprise the streets on either side (in April 2012, the RBI slashed the repo rate by 50 basis points against the streets expectations of 25 basis points), and if a 50 basis points cut is heard from the horse’s mouth, then the market may move northwards. So what does DSIJ feel about this? Are we going with the tide or nurse a different view?We had informed our readers (in Vol no 27, Issue no 10, May 6, 2012) that after the 50 basis points cut in the repo in April 2012, there would be no change in the rate through CY2012, which turned out to be true.

Having said that, we are now going with the tide and supposing that the RBI would cut repo rate in its Jan 29 monetary meet. This is based on both qualitative and quantitative factors. On the qualitative front, the RBI in its previous monetary meet had re-emphasised its guidance of a repo cut in Q4FY13. While the quantitative factors include Industrial Production (IIP), Wholesale Price Index (WPI) and the softening of the bond yield. 

Our economy is facing a growth crisis. This was evident from the Index of Industrial Production (IIP) for the month of Nov 2012 which came in negative at 0.1%. Further, the cumulative growth for the Apr-Nov 2012-13 period stands at 1.0% as against 3.8% registered in the similar period last year. For more on IIP please refer our Mindshare article titled ‘IIP For Nov 2012 Lower At -0.1%”. 

Growth has been the major thirst for our economy and Finance Minister P. Chidambaram has taken reformist action in the past four months to revive the animal spirit and boost investors’ sentiments. We believe that this time Subbarao will join hands with the FM to bring back the Indian growth back on fast track. 

Secondly, Wholesale Price Index (WPI) inflation which was a major concern for the RBI is also softening. The WPI figure for Dec 2012 came in at 7.18% against the street’s expectation of 7.3%, which was positive. Further, it has shown a declining trend from the past couple of months and is currently under the RBI’s comfort zone of 7.5% for March 2013. For more on WPI please refer to our Mindshare article titled ‘Dec 2012 WPI Softens, Food Prices Drive CPI Up.’ 

We suppose that the RBI had maintained “status quo” in the past because of rising inflation and hence it may now go ahead with a cut. 

Also, the bond yield is softening and therefore, fixed income traders are also expecting the rate to soften in the coming meet. On Jan 1, 2013, the benchmark 10-year government securities (G-Secs) moved lower than 8%, reaching a 20-month low. Currently the same is trading at 7.86% which further indicates that rates have softened by 14 basis points in last 25 days.

Looking at the above three factors, we believe a rate cut is an imminent in the next monetary meet. Now the question is by how much? We expect the RBI will go ahead with a 25 basis points cut in its repo rate in its next meet. 50 basis points would be more biased towards growth than inflation. Inflation has shown signs of moderating, but the railway fare hike, fuel deregulation (which includes petrol, diesel, LPG price hikes) would again thrust inflation. Adding to it, the current food prices are still on the higher end impacting the common man at the ground level. 

On the market front, rate sensitive industries like Banking, Realty and Auto stocks would remain volatile in the next couple of trading days. We continue to believe that at this point of time, 25 basis points of repo cut would be an ideal decision by the RBI as it would be a balanced growth and inflation dynamic decision. Nevertheless, we would be updating our readers on the policy going ahead and hence would advise them to keep visiting our website.