The wait for a rate cut gets longer

Reserve Bank of India keeps key rates unchanged, but offers hope for action in January

The Reserve Bank of India (RBI), in the mid-quarter review of its monetary policy today, kept key rates unchanged, disappointing industry and the government, but said it was shifting its focus towards boosting growth, which raised expectations of a rate cut in January.

“Recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter,” RBI said, observing that the headline inflation had been below its projected level in the past two months.

The Wholesale Price Index-based inflation came down to 7.2 per cent in November, from 7.45 per cent in October. The central bank has projected inflation to be at 7.5 per cent March-end. The central bank also left the cash reserve ratio (CRR) unchanged at 4.25 per cent. Bankers said the rate cut cycle might start as early as January and it was likely to be followed up with another round of rate reduction in March.

 

“In the first quarter of 2013, inflation will start to head down and RBI would be more accommodative on the policy rate cut. What RBI has done today is in line with the street expectation,” said Deutsche Bank Co-CEO (Asia Pacific) Gunit Chadha.

HDFC Bank economists said, “Headline inflation is likely to be considerably lower than RBI’s projection of 7.5 per cent for March, at a reading of seven per cent on the back of moderating core inflation. This is likely to prompt the central bank to ease its repo rate by 25 bps (basis points) in the January review and, perhaps, again by a similar magnitude in March.”

Economists said there was also a growing expectation of a CRR cut in January as liquidity deficit in the system continued to stay above RBI’s comfort zone of +/- one per cent of banks’ net demand and time liabilities. Today, banks borrowed above Rs 1.50 lakh crore from RBI’s repo facility. Among the factors that contributed to the present liquidity conditions are corporate advance tax flows and increase in the demand for cash in the festival season.

“RBI will actively manage liquidity to ensure that credit flows are not hampered by liquidity tightness, resorting to open-market operations and, potentially, further cuts in CRR,” said Leif Eskesen, HSBC’s chief economist for India & Asean.

Banks are expected to leave interest rate unchanged following today’s policy announcement. SBI, the country’s largest lender, which met today to take a view on rates, has decided to leave them unchanged, as indicated by its chairman Pratip Chaudhuri earlier in the day.

“Whenever the CRR was cut adequately we passed on the benefit to our customers through rate cut. Since there is no CRR cut, there is nothing to pass on,” Chadhuri had said following the policy announcement.

The market was disappointed with RBI’s status quo, but recovered later on the back of optimism that the banking amendment Bill would get a go-ahead. The BSE Sensex closed 120 points higher than its previous close.

India Inc was also unhappy. Ficci President Naina Lal Kidwai said industry was seeking an impetus for investment and growth and lower interest rates would be oxygen to the sentiment that is beginning to turn positive. Wary of the stubbornly high inflation, RBI has kept its key policy rates on hold since a 50-basis-point cut in April, in contrast with central banks of other big emerging markets such as China, Brazil and South Korea that have been more aggressive in easing policy to support growth.