Conflicting signals on rate cut: who's saying what

There seems to be no consensus among the pundits on what RBI governor will announce at the policy review on March 19

Come March 19, the entire focus would be on what Reserve Bank of India governor D Subbarao does in the review meet on Tuesday. Though there is confusion about the outcome, it appears that a rate cut is imminent. A 25 basis point cut in the cash reserve ratio and repo rate likely to happen. 

 

On Wednesday, the RBI governor said the government "firmly embraced" fiscal responsibility in last month's Budget as the nation strives to slow an inflation rate that remains elevated. "There has been some very welcome, although much delayed, action on correcting both the current-account deficit and the fiscal deficit over the last six months," Subbarao said, according to the text of a speech at the London School of Economics. 

 

Backed by the manufacturing and electricity segments, industrial production increased 2.4% in January, against 0.49% contraction in December 2012. Mining and capital goods disappointed -- production in these segments fell 2.9% and 1.8% in January, against declines of 3.36% and 0.56% in December. As the contraction in the capital goods segment reflected the low investment cycle in the country, industry chambers reiterated their demand of a 50-basis point cut in the policy rate.

 

After three months of decline, the Wholesale Price Index-based inflation rose to 6.84% in February, from 6.62% the previous month, reflecting the impact of fuel price corrections made by the government. Core inflation (that in manufactured products without the food part) fell below 4% for the first time in 35 months, to 3.76% in February. 

 

On January 29, the RBI cut the policy-making interest rate — the repo — by 25 basis points to 7.75%,  the first interest rate cut since the aggressive half a percentage point reduction last April. The repo is the rate at which the RBI lends money to banks.
 

So what is Subbarao going to
do this time around? Business
Standard brings divergent views
on rate cut on the same page

1) State Bank of India (SBI) has suggested to the RBI to lower cash reserve ratio (CRR) and repo rate by 50 basis points, its chairman Pratip Chaudhuri has said. "At present, the CRR is 4%. It should be reduced to 3.5% and the repo rate, which is at 7.75%, should be reduced to 7.25%. This would result in lowering of interest rates on all loans, which would boost the economy," said Chaudhuri.


2) "The tone of the policy guidance is unlikely to change significantly. We expect the RBI governor to maintain a cautious note. Further policy easing will depend on future data, particularly of inflation, given that the retail inflation rate has been in double digits for three months," said Standard Chartered's Anubhuti Sahay and Nagaraj Kulkarni in a report.

3) Morgan Stanley expects the RBI to hold rates steady contrary to widespread expectations of a 25 basis points rate cut. The investment bank says the consumer price index (CPI) remains the "most important measure" compared to the wholesale price index (WPI). CPI has remained high, leading to "elevated and sticky inflation expectations," even as consumer prices could moderate going forward, Morgan Stanley says in a report dated Thursday.

4)  The Finance Ministry has indicated the central bank had the room to cut policy rates in its next policy review. “It is for RBI to take a call on the rate cut and it has all the information needed to take a decision,” Chief Economic Advisor Raghuram Rajan said in an interaction with newspapers on Thursday. He added that in its growth projections for next year, the government had factored in a rate cut by RBI.  “They manage the monetary side. But that does not mean that their aim is controlling inflation only, as the governor himself articulated that they are also worried about growth. Our job is to manage the fiscal side and also focus on growth,” said Rajan.

Also Read |   An open letter to RBI governor D Subbarao


5)  The WPI-based inflation rose to 6.84% in February after falling to a three-year low of 6.62% in January. However, the core inflation — an indicator of demand side pressures on prices — fell below the 4% mark for the first time in 35 months, strengthening the case for a repo rate cut by the RBI, says a report by CRISIL. 
 

Even though input prices have risen sharply due to a weak rupee and rising fuel costs, corporates have been unable to pass on the cost increases into output prices as demand has weakened significantly. This has resulted in a widening gap between input and output prices over the last two years, and reflects the limited pricing power of corporates in a slowing economy, says the report. This is also getting captured in the declining core inflation.

6)  Deutsche Bank believes that the RBI will give more weight to the February WPI outturn and opt for a 25 basis point rate cut in next week's policy.

7)  "We believe that the RBI will do a comprehensive and nuanced analysis of the economy and take the right decision and we hope it will vote for growth. I am happy with what he (RBI Governor D Subbarao) has said," Department of Economic Affairs Secretary Arvind Mayaram said.

8)  The RBI has room to ease monetary policy when it meets next week, the prime minister's economic adviser, C. Rangarajan, said. "As of now, the numbers provide some comfort for the authorities to move in the direction of easing," he said on CNBC-TV18 television news channel.

9) Angel Broking has come out with its report on "IIP updates for January 2013". The research firm expects a 25 bps cut in the repo rate by the RBI in its policy review owing to the moderation in growth and deceleration of WPI inflation along with efforts to narrow the fiscal deficit. As per quick estimates on the IIP, industrial growth in January 2013 improved to 2.4% y-o-y as compared to a de-growth of 0.5% y-o-y in December 2012 and 1.0% y-o-y growth in January 2012.

10) The RBI is likely to lower rates by 0.25% in its monetary policy review and by another 0.50% before the end of this year to perk up growth, a Standard Chartered Bank report  says. "We still expect the RBI to cut policy interest rates by another 75 bps (0.75%) in 2013," Standard Chartered said in a research note.


11) "While trends in the CPI and CAD are worrying, given the sharp deceleration in growth, we expect RBI to cut rates by 25 bps in its policy review  and a further 25 bps in April-May," Rohini Malkani of Citi said in a note.


12)  Moody’s Analytics, a division of Moody’s Corporation, expects the RBI to cut repo rate by 25 basis points. “The recent rumblings from the RBI, including praise for the Government’s reforms and the recent Budget, suggest that a small March rate cut is likely. We expect a 25 basis point cut in the repo rate,” Moody’s Analytics said in a report.


13)  Foreign brokerage HSBC is expecting the RBI to cut the policy rate by 25 basis points. RBI is likely to boost growth on the inflation outlook front.

14) "The RBI may cut the repo rate by 25 bps in March and go for a larger rate cut by of about 50 bps in May," said Soumya Kanti Ghosh, senior fellow, ICRIER.

15) Abheek Barua, chief economist, HDFC Bank, said the RBI will be cautious with retail inflation being stubbornly high.