RBI Makes Much Awaited Move; Cuts Repo Rate By 25 bps

DSIJ Intelligence / 29 Jan 2013

The Reserve Bank of India (RBI), today, in its Third Quarter Review of Monetary Policy 2012-2013, slashed the much awaited repo rate by 25 basis points to 7.75% and accordingly the reverse repo also now stands at 6.75% which is lower by 25 basis points.
The Reserve Bank of India (RBI), today, in its Third Quarter Review of Monetary Policy 2012-2013, slashed the much awaited repo rate by 25 basis points to 7.75% and accordingly the reverse repo also now stands at 6.75% which is lower by 25 basis points. Further, other key policy rates like Marginal Standing Facility (MSF) rate and Base rate both stand at 8.75% down by 25 basis points.

All the above would be applicable from immediate effective. We, at Dalal Street Investment Journal (DSIJ), had also expected a 25 basis points of repo cut (one can refer to our earlier Mindshare article Titled ‘DSIJ Expects 25 Basis Points Repo Rate Cut’).

The RBI Governor, D Subbarao lived upto his reputation of surprising the streets, as he slashed the Cash Reserve Ratio (CRR) by 25 basis points to 4% which would be effective from the fortnight beginning Feb 9, 2013. The reduction in CRR would infuse around Rs 18000 crore into the system.

More importantly, the apex body revised the GDP growth downwards by 30 basis points to 5.5% for FY13 and expects inflation to soften in the coming days, revising WPI Inflation target downwards by 70 basis points to 6.8% for March 2013. 

The following are some of the key policy highlights extracted from the RBI Third Quarter Review of Monetary Policy 2012-2013:
  • The series of policy measures announced by the Government has boosted market sentiment; although investment   outlook is still lackluster, particularly in terms of demand for new projects. Consumption demand too is slowing.
  • According to the report, analysis of the early results of corporate performance in Q3 indicates that both sales and expenditure growth moderated while profit margins remained broadly unchanged.
  • Forecast for Deposit growth (M3) for the FY13 is revised, lowered by 100 basis points to 13% while advances growth is unchanged at 16% for the banks.
  • It is critical that even as the monetary policy stance shifts further towards mitigating growth risks, the objective of containing inflation and anchoring inflation expectations is not de-emphasised.
  • The policy stance intends to provide an appropriate interest rate environment to support growth as inflation risks moderate; contain inflation and anchor inflationary expectations; and lastly continue to manage liquidity to ensure adequate flow of credit to the productive sectors of the economy.
On the Guidance front, Subbarao said that, “there is an increasing likelihood of inflation remaining range bound around current levels going into 2013-14. This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks.” The above policy guidance will, however, be conditioned by the evolving growth inflation dynamic and the management of risks from twin deficits.

We believe that banks would reduce their deposits and lending rates, however, in a gradual manner, over the period of time and according to their asset –liability miss-match. 

Overall, it was a much awaited relief from the market point of view. However we are little skeptical on the inflation guidance of 6.8% for March 2013 (against 7.2 for the month of Dec 2012), which we believe could be missed considering the fact that the railway fare hike, fuel deregulation (which includes petrol, diesel, LPG price hikes) and higher food prices would continue to fuel inflation. And if the same goes than we may again see a “status quo” in the next Mid Quarter review of the monetary meet, which is scheduled for March 19, 2013.  

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