Market looks for signs of policy shift

While at least a 25-basis point (bp) rate cut, along with liquidity infusion measures, have been factored in from the Reserve Bank of India's annual policy to be announced on Friday, market participants will look to see if there is a shift in the policy stance.

Though the central bank has reduced interest rates in the past two policy statements, in January and March, it declined to drop the guard on inflation.

In the March policy, RBI had said further scope for rate cuts was limited, citing the wedge between retail and wholesale inflation and the widening current account deficit (CAD).

The market is now waiting to see if the stance is changed to pro-growth, from anti-inflationary. The drop in headline inflation for two months, with softening of global commodity prices which will have a favourable impact on both inflation and CAD, might help the central bank adopt a more pro-growth approach. In addition, benign core inflation is also seen to be a comforting factor for policy makers at Mint Road.

"Growth will receive a larger focus. The stance will be less hawkish, as compared with the previous policy statement. While there would be lingering concerns on the consumer price index (CPI) and the yet wide CAD, the tone of the policy statement will be significantly less hawkish than the previous one," predicts Shubhada Rao, chief economist, YES Bank.

According to market participants, if RBI acknowledges that a benign interest rate regime is crucial for revival of investment and economic growth, the possibility of future rate cuts will increase.

The main reason for RBI not to drop the guard on inflation and continue with a hawkish tone will be because of high consumer price inflation.

"RBI will take a cautious stance and reiterate that if the trend of the recent developments continue, in terms of softening of inflation and commodity prices, then there probably can be more rate cuts. But I do not think they will give a clear signal of more cuts as on May 3 because they are very conditional that way. RBI will wait and watch to see how things pan out. The guidance might not be as hard as it was in March. They will have to acknowledge the recent developments but they will not let down their vision on inflation," said Anubhuti Sahay, economist at Standard Chartered Bank.

In 2012-13, RBI had cut the repo rate by 100 bps in three tranches. In April 2012, it was cut by 50 bps and then by 25 bps in January and in March. The rate is now 7.5 per cent.

The wholesale price index for March rose 5.96 per cent after an annual uptick to 6.84 per cent in February. The CPI rise slowed to 10.39 per cent in March, compared with 10.91 per cent in February; it continues to be sticky.