RBI Cuts Repo Rate By 25 bps, CRR Unchanged

As expected by economists and experts, the RBI has cut the repo rate by 25 bps and has kept the cash reserve ratio unchanged. Following this, the 10-year government bond yield has gone up by 5 bps to 7.77%.

The Indian markets, which had surged on speculations of a 50 bps rate cut, turned volatile immediately after the credit policy announcement but are showing some recovery. The BSE Sensex and the Nifty are both trading down by 0.3%. Bankex and Realty indices are down more than 1% at this time, indicating that the credit policy has come in below the expectations of these sectors.

The market was sensing a slashing in rates right from the time when the inflation figure for March 2013 came in at 5.96%. The drop in energy prices as well as food prices had set the ground for a rate cut. The IIP number for February 2013 remained at 0.6%, which also meant that the industry expected to see a pro-growth stance from the RBI.

Speaking to DSIJ yesterday (May 2), Shubhada Rao of YES Bank expressed the hope that the RBI would cut the repo rate by 25 bps. This time around, the RBI has delivered the same.

However, like in the last meeting, the central banker has maintained a hawkish stance on the growth front. Governor Subbarao said that the GDP growth for FY14 will remain at 5.7%, which appears to be a fairly conservative estimate as the government believes it can deliver GDP growth of over 6% in the fiscal. On the inflation front, he has said the WPI for FY14 will stand at 5.5%.

The RBI has said that the Current Account Deficit (CAD) remains a huge concern even now as it will put pressure on government finances. Maintaining this low growth stance, Subbarao has said that the chances for further rate cut remain feeble.

On the economic front, Subbarao noted that recovery in the global economy remains sluggish. The domestic services sector has been going through a phase of slowdown, and no change in scenario is expected in the first half of the fiscal. Some uptick, however, can be expected by the second half of FY14. Industrial growth has been going through a rough phase due to the weak demand scenario and as per the RBI, it will not show any significant improvement in FY14. Besides due to the slowdown, no new projects are expected in the fiscal.

Following this, the market will again start tracking the earnings as well the industrial output. The market is expecting approximately rate cuts of 25-50 bps further in the year, but we remains sceptical on this. Besides, commodity prices have fallen, which is good for the markets and will help them move higher.