Shift in policy stance likely

The Reserve Bank of India (RBI) is likely to signal a shift in policy stance — from bringing down inflation expectations to improving growth expectations. On the domestic front, food inflation dropped to 6.6 per cent, the lowest in nearly three and a half years in late November. And, with global commodities correcting, there is slight optimism on inflation moderating to seven per cent by March 2012.

IIP numbers have declined significantly to negative 5.1 per cent, followed by poor gross domestic product growth, which is expected to slow to below 6.5-7 per cent in 2012-13. RBI is also uncomfortable with the current liquidity situation, which is likely to decline further with advance tax collections after December 15. It also faces immense pressure, in terms of arresting the weakness in the rupee by selling dollars and buying rupees, which is expected to shoot to 54 levels on global factors.

We feel RBI would take a pause in its rate rise cycle and maintain key policy rates in this review meeting. RBI had indicated the cash reserve ratio (CRR) was a policy-signalling tool and, hence, was not willing to use it as a liquidity-easing tool. The fact that RBI is continuing with its bond purchases may prevent it from reducing the CRR. RBI may not want to signal it is done with inflation fighting so soon, after raising rates in October, and may not cut the CRR in this policy review. Given it is continuing with open market operations and the fact that the CRR is a policy tool, the central bank may use other liquidity tools like allowing banks to access its repo window for funds over and above their statutory liquidity ratio limits. Additionally, we could see the markets entering a range, with 10-year bond yields at around 8.4-8.7 per cent, the Nifty at 4,400 - 4,900, the rupee at 52-54 against the dollar, and the euro dipping below 1.28 soon.

 

Abhishek Goenka
CEO, India Forex Advisors