RBI Finds Low Scope For Further Rate Cuts

The Reserve Bank of India has cut the repo rate by 25 basis points in today’s monetary policy meet. This is in line with the market expectations and hawkish stance of the apex bank is seen negatively by the markets. Those who expected a 50 bps rate cut are left disappointed.

The RBI, in its commentary, has said that the macroeconomic condition remains weak with higher inflation and lower growth. It has also expressed concern on the current account deficit since it has continued to remain above the sustainable level. On the inflation side, it has said that the same will remain range bound for the period of FY14 because of the demand-supply imbalances. Citing the worries over the CAD, the RBI has said that there is limited headroom for further rate cuts going ahead.

This is the second successive repo rate cut in 2013 and a third one in FY13. In the January 2013 meeting, RBI cut the repo rate by 25 bps and CRR by 25 bps. Currently, the repo rate stands at 7.5% and CRR at 4%.

Banking stocks have been hit worst by this as the sector was expecting a further cut in the CRR which would have enhanced the liquidity in the sector. In yesterday's bankers’ meet with RBI, SBI had lobbied strongly for a CRR cut but RBI's action has left the sector frenzied.

The possibility of a cut in the repo rate had gained ground after the GDP growth for the December 2012 quarter had fallen to a decade low of 4.5%. On the inflation side, WPI for February 2013 was at 6.84%, from 6.62% in the earlier month. The consumer price inflation has also been in the double digits for three months in a row. Considered the higher inflation in the country, RBI was hardly left with any scope to cut the rates. It's only the pro-growth stance of RBI that has given the industries a rate cut. Not to forget that the industrial growth in the last one year has tumbled.

The government, in this fiscal, has kick-started long pending reforms in few sectors. The government has also promised to cut the fiscal deficit to 4.8% of the GDP by FY14 and further to about 3% of the GDP in by FY16. On the growth side, the government is targeting a growth of 6% for FY14 and the PM himself has assured that the economy will see a robust growth in the next two to three years. For that to come in effect, the interest rates have to come down which now seems like a distinct possibility considering the last two years of history.

The moot question is whether a 25 bps rate cut will kick in the capex cycles of the corporate. So far the country has not seen capex cycles kicking in after seeing two repo rate cuts. But it is the economy which takes time to heal. It would be too early to say anything about the economy.

On the BSE, Realty, Metals and Bankex indices have tanked as soon as the RBI announced the policy. It could mean that these sectors could face some headwinds ahead in the year.