RBI hawkish, Survey bullish

Subbarao's message on Budget-eve: Fix the fisc

Finance Minister Pranab Mukherjee got an important Budget-eve message from Reserve Bank of India (RBI) Governor Duvvuri Subbarao: unveil “credible fiscal consolidation”, as lax policies were hurting the central bank’s efforts to reduce lending rates.

In its mid-quarter review of the monetary policy on Thursday, RBI left key rates unchanged (the repo rate remains at 8.50 per cent — the third straight meeting at which the rate has been held steady) and took a hawkish line on inflation, moderating hopes that it would cut rates in April. The central bank said risks to inflation had increased due to a recent spurt in crude oil prices, a wide fiscal deficit and a weakening rupee.

“Notwithstanding the recent deceleration in growth (growth fell to 6.1 per cent in the October-December period), inflation risks remain, which will influence both the timing and magnitude of future rate actions,” RBI said.

Though the policy outcome was broadly in line with expectations, what surprised market participants was the hawkish tone. While stock prices extended losses (the Bombay Stock Exchange Sensitive Index closed 1.4 per cent lower at 17,675.85), government bond prices fell.

Industry was disappointed, with RPG Group Chairman Harsh Goenka saying a “respite on interest is overdue”.

Citigroup economists Rohini Malkani and Anuskha Shah said the tone of the policy was more hawkish than expected, while Nomura India said it had slashed its rate-cut forecast for calendar year 2012 to 75 basis points from 100.

Others agreed. Samiran Chakraborty, chief economist and head of research, Standard Chartered Bank, said, “The central bank has refrained from giving a clear indication of a rate cut in April.”

In the policy document, the central bank has pointed out the government’s fiscal condition deteriorated in 2011-12, with key deficit indicators already crossing Budget estimates for the full year due to a sharp increase in subsidies apart from sluggishness in tax revenues.

While bankers in general said they would not take any action on the rate front as yet, some good news for borrowers came from State Bank of India Chairman Pratip Chaudhuri was more optimistic. "I see some room for cutting lending rates following the cut in the cash reserve ratio (CRR) last week. It’s not right for me to pre-decide the issue, but when we had a 50-basis point CRR cut last time, we passed it to our customers with a significant cut in the rates of our education loans. Similarly, we will definitely cut rates (again) but the segments and extent will need a more granular analysis,” he said.

Some analysts, however, still expect a 25-basis point rate cut at the monetary policy review in April despite RBI's strident tone on inflation. While Lief Eskesen, chief economist for India and Asean of HSBC, said RBI would possibly begin cutting rates in April, Motilal Oswal, chairman and managing director at Motilal Oswal Financial Services, said he agreed.