The suspense over tomorrow’s monetary policy stance deepened today, with the Reserve Bank of India (RBI) raising concerns on inflation and at the same time admitting the slowdown in growth made a case for easing policy rates.
The central bank has, however, almost ruled out any further reduction in the cash reserve ratio as it expects liquidity to remain comfortable, going ahead.
Market participants, however, see a glimmer of hope for a rate cut from the statement that the average rate of inflation for FY13 will be close to the present level, that is seven per cent, as compared to 8.8 per cent in FY12. The lower inflation expected will give more room to the RBI to ease the tight monetary policy.
After it raised interest rates 13 times between March 2010 and October 2011, the central bank pressed the pause button in two consecutive policy meetings — something it termed a ‘neutral’ stance.
“Inflation expectations moderated in the Q4 of 2012-13 but remain high. With significant upside risks to inflation, monetary policy needs to keep them anchored, while shifting the balance of the policy to arrest the deceleration in growth momentum,” the RBI said in its macroeconomic and monetary developments report, released a day ahead of the policy.
“The downside risks to growth, however, continued to rise reflecting a weakening global economic outlook and domestic policy uncertainties. While room for easing policy rates exists from here, the timing and extent of cuts will need to factor in the inflation risks that persist in 2012-13,” the RBI said, indicating rate cuts would be few and far between till inflation changed trajectory.
A Prasanna, chief economist, ICICI Securities Primary Dealership, said, “The RBI is still cautious of inflationary risks, though the March WPI data showed lower core inflation. I expect it to cut the policy rate 25 bps and keep the cash reserve ratio unchanged. Thereafter, it may not get an opportunity to cut rates for the next six months. The RBI may wait to see the impact of a likely fuel price hike in the May-June period.”
A host of reasons have been cited that could lead to a rise in prices, from risks of an increase in global commodity prices to depreciation of the rupee, and wage pressures in both rural and urban areas. The report argued if the government wanted to contain subsidies within the target presented in the Budget, a significant revision in administered prices would be required, which would cause a spike in the price levels.
Wholesale price index-based inflation for March hovered near the double-digit mark for about 20 months before showing signs of moderation in November, mainly due to the base effect. Inflation grew 6.89 per cent in March but what will comfort the central bank is core inflation falling below five per cent. The RBI sees inflation to be sticky in the current financial year and it may stay close to the current levels. On the external sector, the central bank has called for policy reforms for an increase equity flows and emphasised lower dependence on debt capital flows.