No succour for market

Players say RBI has no magic pill to boost growth, even as economists expect rate cuts to start from March.

The change in the central bank’s stance is now official. Even as inflation remains above its comfort level, the Reserve Bank of India (RBI) has stated in its mid-quarter monetary policy review that “from this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.” Going by the tone, economists are expecting rate cuts to start from March 2012.

This, however, has brought little cheer to the equity market, which actually was expecting a cut in CRR. While a reversal in the rate cycle would actually have supported the rate- sensitive sectors, it would have diluted the central bank’s anti-inflationary stance. So, it’s not surprising that the central bank has left all key policy rates untouched. Kislay Kant, director, research, at Mape Secrities, believes a pause by RBI will not be enough to restore confidence in the cyclical sectors in India, but the change in trend is welcome. The decision by RBI to leave everything unchanged is moderately negative on the overall market sentiments. Since the second quarter of FY12, the market has been expecting the rate cycle to show some sign of easing. Typically the rate reversal is a big trigger for equity markets. According to Standard Chartered, portfolio flows in FY12 till date (as of December 16) fell to $5.7 billion from $29.8 billion during the same period last year. As inflation eases to 6.5-7 per cent levelsby March and RBI actually starts cutting rates, brokerages expect portfolio flows to show some signs of revival in the second half of 2012.

However, flows are unlikely to come anywhere close to 2010 levels, as growth concerns will persist. Standard Chartered believes that despite stable flows in the form of services exports and remittances, funding the current account deficit — forecast at 3.1 per cent of GDP in FY12 and 2.8 per cent in FY13 — may prove challenging, especially as growth concerns keep capital flows weak. Many believe the central bank has responded conservatively to the clamour for a rate cut, as it believes monetary policy interventions are not enough to spur growth. Its past statements have repeatedly highlighted various other issues that plague economic growth. Taimur Baig and Kaushik Das of Deutsche Bank sum up RBI’s stance rather well: “Clearly, the view is that growth cannot be tackled by easy monetary policy alone, and, therefore, expectations of major growth supportive measures from RBI should be tempered.”