RBI would have to cut rates further: Sunil Godhwani

The Reserve Bank of India (RBI)'s annual monetary policy for 2013-14 (April-March) was very much on expected lines. Given the constraints emanating from the growth-inflation trade-off, the central bank cut its key repo rate by 25 basis points. Though some market players had expected a 50-bps cut, RBI avoided a bigger reduction. And, rightly so, because upside risks to inflation are still significant. Even as wholesale price index (WPI)-based inflation has cooled, consumer price index-based inflation is still in double digits.

The cash reserve ratio (CRR) was left unchanged, though some banks had hoped for a cut, given liquidity has remained tight, with average daily bids at the repo window at Rs 1 lakh crore. It is likely RBI would address the liquidity deficit with an aggressive bond purchase programme. With RBI refraining from a CRR cut, it remains to be seen if banks would lower their lending and deposit rates immediately.

Importantly, the central bank's growth estimate for this financial year is 5.7 per cent, sharply lower than the government's estimate of 6.4 per cent. This clearly shows the central bank doesn't expect growth to revive in a hurry. The policy sees WPI-based inflation in 2013-14 at 5.5 per cent, sharply lower than its last year's revised estimate of seven per cent.

To keep market expectations low, the cautious policy might have reiterated its statement that there was little room for further rate cuts. However, going by RBI's estimates for growth and inflation, the central bank would have to further cut interest rates to kick-start growth.

A pick-up in growth would create demand in the economy, revive the investment cycle and create jobs in our young, aspirational society. The fall in commodity prices and a benign global inflation outlook, coupled with the government's commitment to fiscal consolidation, are likely to make RBI's job easier.

We expect RBI to cut the repo rate by another 75 bps in the remaining part of 2013-14, but in a gradual manner and with a focus on effective monetary transmission. There is, however, a caveat. We would have a new RBI governor in October, and the central bank's policy stance may see a change in the second half of 2013-14.

Sunil Godhwani
CMD, Religare Enterprises Ltd