Inflation below 8%, but analysts don't see CRR cuts

Inflation (WPI) for December 2011, riding on high base coupled with lower food prices, at 7.47% is significantly lower than 9.11% the previous month. Analysts say this is in line with market expectation and may not have any significant impact on RBI policy review next week.

Analysts at Japanese bank Nomura said, “Going forward, we expect headline inflation to remain near 7% between January and March 2012. Even as food inflation accelerates, we expect weak demand and base effects to lower core inflation, though rupee depreciation is a risk to this view.”

Nomura said: “In the upcoming policy meeting on January 24, we expect the RBI to keep the repo rate unchanged due to the elevated core inflation reading. While there is a case to cut the cash reserve ratio in order to alleviate the current liquidity deficit, the RBI’s recent statements that the CRR is a monetary policy signal suggests that open market operations will remain the preferred tool to inject liquidity until core inflation eases further.” 

BNP Paribas analysts also said there won't be any rate action. “Not much is expected in this policy review, though a section of the market is expecting a rate cut. Reportedly, the RBI has clarified that there won't be any CRR cut in this review. Hence, what we can look forward to is a stronger acknowledgement of the change of stance from inflation management to growth management for 2012.”

Barclays Capital analysts said today's inflation report does not meaningfully alter their expectation from the RBI in the near term.

"While generally weak growth momentum is increasing pressure on the RBI to ease monetary policy, persistently high inflation continues to act as a deterrent to any rapid change in policy rates. That would leave the central bank vulnerable to criticism if there were further upside surprises in inflation. Our base case calls for a cut in the policy rate from Q2 12. however, we acknowledge that the chances of the easing cycle starting in March have increased significantly of late," they said.
 
According to the analysts, open market operations (OMOs) will be the preferred mode. "Given the rising concerns about growth and the continued tightness in liquidity, we believe that the RBI will continue to inject liquidity into the system using OMOs. A reduction in the cash reserve ratio at the January policy meeting appears unlikely," the experts said.